How you could make more of your pension thanks to the higher Annual Allowance

During the 2023 Spring Budget, chancellor Jeremy Hunt announced some key changes to pension legislation.

Perhaps the most publicised of these was the abolishing of the Lifetime Allowance (LTA), a threshold for how much you could tax-efficiently accrue in your pensions in your lifetime without facing an additional tax charge.

This has been widely commented on as it has opened up financial planning opportunities for high earners, making it more attractive for many to contribute more to their pots.

But one other important yet seemingly far less discussed change was an increase in the pension Annual Allowance. Starting from 6 April 2023, the chancellor increased the Annual Allowance from £40,000 to £60,000.

This change could mean that you’re able to save significantly more into your pension each tax year. This could be particularly powerful if you’re a high net worth individual or own a business. Yet, data shows that many people are not making the most of this increase.

So, discover how the Annual Allowance works, why you may be able to benefit from this increase, and what it means for making the most of your pension savings.

You can now tax-efficiently contribute up to £60,000 a year

The Annual Allowance is the maximum you can tax-efficiently contribute to your pension each tax year. This includes your personal contributions and any made by a third party, such as an employer or from your company if you’re a business owner.

Having stood at £40,000 since 2014, the chancellor increased the Annual Allowance from 6 April 2023.

With effect from 2023/24, the Annual Allowance was increased to £60,000. You can only get tax relief on personal contributions up to 100% of your earnings. However, contributions made directly from your company are not restricted by your earnings. So, if you own a company, you could make use of the full £60,000 allowance, even if your earnings are lower than this.

Bear in mind that for company contributions to be tax-efficient, they must meet HMRC’s “wholly and exclusively” test. This means that HMRC considers the contributions to be exclusively for your trade or profession, and whether your total remuneration from your company is “commercially reasonable”.

It can be sensible to speak to an accountant to ensure that you’re not falling foul of any rules in this regard.

You can also carry forward unused Annual Allowance from the previous three tax years, potentially allowing you to contribute more than the Annual Allowance in a single tax year. Tax relief on personal contributions paid using carry forward is still limited to 100% of your earnings in the tax year that they are paid. However, this is not the case with company contributions and, so, this can be particularly powerful if you make employer contributions from a company you own.

You’ll usually receive tax relief on personal pension contributions up to the Annual Allowance. This means that an £80 contribution technically only “costs” £100, as you receive 20% basic-rate tax relief.

This is just £60 for higher-rate taxpayers and £55 for additional-rate taxpayers. You usually must claim the additional 20% or 25% tax relief on your self-assessment tax return.

Employer pension contributions are paid gross into a pension arrangement but will generally be deductible for Corporation Tax purposes and will not incur any personal taxation.

It’s worth noting that you may have a reduced Annual Allowance, such as if you:

  • Are a particularly high earner. If your income exceeds certain thresholds, you may see your Annual Allowance reduced, down to a minimum of £10,000.
  • Have already flexibly accessed your pension. In this case, you may be subject to the Money Purchase Annual Allowance, reducing your tax-efficient pension saving threshold to just £10,000.
  • Have no earnings. You can typically contribute up to £3,600 each year to a pension in this instance. This includes the 20% Income Tax relief you’ll receive on your contribution, meaning you only need to contribute £2,880 net to use your entire Annual Allowance.

Exceeding the Annual Allowance usually means that you will face a tax charge on these contributions, known as an “Annual Allowance tax charge”. This essentially sees the amount in excess of your Annual Allowance added on top of your taxable income in order to determine the rate of Income Tax that the excess will be subject to.

Just 1 in 3 high earners are making use of the increased Annual Allowance

An increased Annual Allowance may seem like a significant financial planning opportunity. Provided that you have sufficient earnings, then being able to tax-efficiently contribute more to your pension each year could allow you to build a larger pot. This could allow you to more easily save what you need to fund your dream retirement.

Furthermore, it means you can benefit from a greater amount of tax relief. And, if your employer matches pension contributions, you may receive additional money when you pay into your pot.

Yet, despite these potential benefits, data shows that many high net worth individuals aren’t making the most of this opportunity. According to FTAdviser, although 42% of high net worth individuals said they planned to take advantage of the increase, only one-third had actually contributed more than the previous £40,000 limit.

That means two-thirds of high net worth individuals aren’t making the most of this chance to make additional contributions, even though it could make a significant difference to the size of a pension when you come to access it.

Making greater contributions to your pension could substantially increase the size of your pot

It’s obvious that contributing more to your pension fund could increase the amount you have to hand when you come to access it.

But the extent to which this is true may be surprising. Thanks to the combination of tax relief and the fact that your pension savings will be invested throughout your career, making greater contributions could significantly increase your retirement savings.

Standard Life figures demonstrate just how powerful this can be. The product provider calculated the impact of a 22-year-old on a salary of £25,000 increasing their pension contributions from the minimum of 3% to 5% (alongside the required minimum 5% employer contribution).

Assuming this individual received a 3.5% increase in their salary each year and achieved 5% investment growth alongside a 1% annual charge then, based on contributing the original 3%, they would have £434,000 by the time they turned 66.

Yet, if they increased their pension contributions by just 2%, they could potentially add £108,000 to their pension, giving them a total of £542,000.

Now, if you have sufficient earnings, imagine the impact you could have by increasing your contributions to make the most of the £60,000 Annual Allowance.

Similarly, if you have surplus cash in your business that you’d like to extract tax-efficiently, then making a contribution to your pension could be an extremely effective way to do so.

Even if you don’t or can’t make use of the entire amount, a modest increase could still make an impactful difference to the retirement savings you’re able to enjoy in future.

Get in touch

Want to find out how you could make the most of your pension? Get in touch with us at Britannic Place.

Email or call 01905 419890 to find out how we could help you today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

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