Making pension contributions before the end of the tax year
The end of the tax year is just around the corner (5th April 2016), and if you have been wondering what that entails for your pension then here’s what you need to know:
The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000 although a lower limit of £10,000 may apply if you have already started drawing a pension. The annual allowance applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all of the contributions that you or your employer pay or anyone else who pays on your behalf.
But what happens if you exceed your allowance?
Basically, you won't receive tax relief on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge. The annual allowance charge will be added to the rest of your taxable income for the tax year in question, when determining your tax liability. OR alternatively, if the annual allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits, but this means your pension scheme benefits would be reduced.
Pension input period
The annual allowance is the total pension contributions made to your schemes and/or benefits built up over a period called the pension input period that ends during the tax year (again 5th of April, write it in your diary!) A pension input period normally lasts for one year, but doesn’t necessarily cover the same dates as a tax year. Keep in mind that the pension input period is specific to each pension arrangement, so if you have more than one pension, you may have different PIPs for each. The choice of the end date for each PIP can be a useful tool for tax planning purposes. Your pension provider or scheme administrator should be able to give you your pension input amount for that scheme.
If you think you might be getting close to your annual allowance or that you have exceeded it, it might be a good idea to talk to an Independent Financial Advisor. Click Here to find out how to choose an IFA or email firstname.lastname@example.org