As a company director, you’ll probably want to have one eye on the future – and planning for retirement is no different.
If you decide to open a pension scheme, you’ll get tax relief on any contributions you make – up to certain levels. All UK residents can set up a pension scheme, including children and non-earning spouses.
But what does it all mean? We’ve created this handy guide that explains the types of pension schemes available, and how you can save for the future in a tax efficient way.
What are they?
Personal and stakeholder pensions are privately funded schemes. You can pay contributions until you reach the selected retirement age. The money is then generally turned into retirement benefits, consisting of a regular income and a tax-free lump sum.
If you take out a stakeholder scheme, you can pay additional lump sums into the pension pot subject to a minimum value of £2. You won’t be charged a penalty if you stop paying into the policy, or choose to transfer your money elsewhere.
What tax relief can I get?
You will get tax relief on your contributions up to certain limits. These are:
- 100% of your net relevant earnings in a year
- Tapered annual allowance if your salary or ‘adjusted income’ is £150,000 or more
- £1 million in your lifetime – known as the ‘lifetime allowance’
If you don’t use all your annual allowance in one year, any remaining amount can be carried forward and added on to the following year. However, you are only able to carry over the last three years’ worth of unused allowance.
You won’t get tax relief on any contributions over these limits, or if your pension provider:
- Isn’t registered for tax relief with HMRC
- Doesn’t invest your pension pot according to HMRC’s rules
You’ll receive tax relief automatically if your pension provider claims for it at the basic 20% rate and adds it to your pension pot – known as ‘relief at source’. If you’re a 40% or 45% rate taxpayer, you can claim tax relief yourself on the remaining 20% or 25% via your self-assessment tax return.
It’s important to make sure the tax relief you receive isn’t worth more than 100% of your annual earnings, as you’ll be required to pay money back if you go over this limit.
What is a tapered annual allowance?
Any contributions you make up to the value of £40,000 will be tax-free, as long as your salary or ‘adjusted income’ is less than £150,000. If you earn more than this amount, your tax-free allowance will reduce by £1 for every £2 you’re above the limit.
Example: if your salary or ‘adjusted income’ is £155,000, your annual allowance will reduce to £37,500.
The lowest amount your annual allowance can drop to is £10,000. This happens when your income is £210,000 or more.
What is adjusted income?
Your adjusted income amount includes anything HMRC requires you to declare on your self-assessment tax return. This includes:
- Your company’s pension contributions
- Any salary sacrifice arrangements you might have
- Your personal pension contributions
- Any additional taxable income you earn from savings and investments, bonuses and buy-to-let income
- Any commission you might earn
Will I pay tax when I withdraw my pension?
You can usually take 25% of your pension pot tax-free. Your provider will take tax off the remaining 75% if you withdraw it.
When you take money out of your pension, you’ll be charged tax on any income above your personal allowance according to your personal tax rate.
There are a number of ways you can withdraw your pension, so please speak to your provider for more information.
Need more help?
We hope this guide has helped you get to grips with the basics of personal and stakeholder pension schemes. If you want more information, we’re here to help.
At ClearSky Contractor Accounting, we understand that everyone’s different. That’s why we tailor advice to suit you and your circumstances. We’ve helped thousands of contractors just like you save for the future and reap the rewards of their busy WorkStyle.
We’re committed to being with you all the way throughout your career, whenever you need us.