Pension contribution limits
You were once able to make large individual contributions into private pension arrangements however, with the introduction of the Finance Act 2009 and 2010, there are now pension contribution limits put in place. You are now limited to the following in any one tax year
- 100% of earnings or £3,600, whichever is greater
- An overall cap of £50,000
Some individuals may be able to take advantage of the ‘carry forward’ rule however, this is a transitional arrangement and will only be available for a limited period.
Pension tax relief
The main advantage for pensions is tax relief on contributions. No other investment wrapper benefits from this basis and it is why pensions should be the main focus of any retirement planning.
Pension tax relief – how does it work?
Basic rate tax relief
As long as your pension contribution satisfies the above pension contribution limits it will be eligible for tax relief at your highest nominal rate. All new private pension plans benefit from basic rate tax relief at source. There are a few older pension plans that may not, such as Retirement Annuity Contracts.
For example, if you were to contribute £80 into a personal pension, your pension will be credited with £100.
Higher rate tax relief
Although you benefit from basic rate tax relief at source, with regards to higher rate tax relief (a further 20%) you have to claim this relief back from the Inland Revenue. There are millions of pounds in unclaimed tax relief every year so it is important that you remember to claim. This is done by way of self-assessment at the end of the tax year.
Utilising the ‘carry forward’ rule and claiming higher rate tax relief can be complicated. If unsure, you should contact a pension specialist to help you.