Lowes Magazine Issue 125

PENSION

The Lifetime Allowance tax trap THE AMOUNT THAT CAN BE SAVED INTO A PENSION over a lifetime – the Lifetime Allowance (LTA) – is catching out more and more people. Latest data from HMRC shows around 8,600 people breached the limit in 2020-2021 tax year and the amount collected in tax rose 11% from £344m in 2019/20 to £382m. As the LTA was frozen in April 2021 at £1,073,100 until April 2026, figures are expected to have climbed for the 2021-2022 tax year, and to continue to do so as many more pension savers could potentially fall foul of the limit and face a tax penalty over the next four years. Those in final salary/defined benefit (DB) pensions may inadvertently breach the allowance as their total pension is assessed by calculating the yearly pension and multiplying it by 20 times, then adding any lump sum which may be taken from the scheme. Also to be taken into consideration is that this is an overall allowance and therefore covers all pensions held by the individual. Anyone who has more than one pension will need to add up their total pension value. Workplace pensions from former employers that haven’t been moved but may have been accumulating in value are included. Any amounts over the lifetime allowance will be subject to either a 25% or 55% tax charge when either an income or lump sum is taken from the pension, or age 75 is reached with unused pension benefits. There are various ways to mitigate against breaching the allowance, such as taking benefits or an income early, taking tax free cash out of the pension, paying into a spouse/partner’s pension, and if eligible, applying for one of the pension tax protection strategies – depending on whether you have a final salary/DB pension or a personal/defined contribution pension. And in some cases, you can be better off in terms of your overall wealth long term by continuing to pay more into your pension and paying the tax – as contrary as that may sound. This is a complicated area so we recommend seeking the help of an Independent Financial Adviser who can talk you through the various scenarios to make sure you choose the right one for your circumstances.

Could you be paying 60% tax?

As with other tax issues, Lowes can help, so please speak to your Adviser or call the office on 0191 281 8811. Anyone with high annual earnings should be looking to maximise their pension contributions particularly where, as in this example, two and a half times the net cost will be allocated to their savings. HIGH EARNERS COULD BE PAYING 60% IN TAX DUE TO one of the complicated rules around income tax in the UK. This arises due to the rule on the tapering of the personal allowance, which affects those earning between £100,000 and £125,140 per year. The tapering applies to the £12,570 personal allowance everyone can earn each year without paying tax. Tapering reduces that amount by £1.00 for every £2.00 earned over £100,000. This means that an individual earning £125,140, will pay 40% on the £25,140 above £100,000 and 40% on £12,570 personal allowance, the sum of which, £15,084 equates to 60% tax paid on this part of the income. Anyone earning above £125,140 does not receive the personal allowance. A way to mitigate this tax is to pay more into your pension in order to lower the amount of earnings to which the tapering applies. An individual earning £125,140 could redirect £25,140 (this includes the basic tax relief) to their pension pot at a net cost to them of only £10,056.

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