Many people save for their retirement either via a defined contribution or defined benefit pension scheme.
For tax relief purposes, the Annual Allowance is a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit (final salary) pension scheme each year. This Allowance is normally capped at £40,000.
For high earners, the Annual Allowance is tapered, meaning maximum tax-relieved contributions to their pension scheme, or growth in a final salary scheme, are reduced to a minimum of £10,000. This can be a real problem for those in final salary schemes such as teachers or doctors, who have little or no control over the increase in value of their pension pot each year.
If you exceed your available Allowance in a year, 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 at your highest marginal rate of tax.
In certain circumstances, there is an opportunity to request that your pension scheme meets pension excess contribution charge rather than you having to pay it directly. This reduces the value of your total pension pot by the amount of tax payable, but the impact on your final pension income may be relatively low.
We can help you to work out if the Tapered Annual Allowance applies to you, what any potential tax liability might be, and, if appropriate, in completing a Scheme Pays election to save you the cost of an immediate tax charge.
If you would like more information on our services or would like an initial consultation with one of us to discuss your circumstances, please call or email Alison Asher.