At Cleveden Park Wealth, we are dedicated to ensuring you have access to essential financial information that can positively impact your financial future. In this newsletter, we want to shed light on the powerful relationship between pensions and tax planning, especially for those who find themselves in higher tax bands.
Pension Contributions for Tax Efficiency
Pensions can serve as a valuable financial planning tool, particularly if your income places you in a higher tax band. As your trusted financial advisors, we want to highlight some key considerations:
Crossing into a Higher Tax Band: If your total income pushes you into a higher tax band, you might benefit from making pension contributions. Let's illustrate this with an example. If your income is £48,662, you would pay 42% tax on the portion that falls within the higher-rate tax band. However, a £5,000 gross pension contribution (£4,000 plus £1,000 tax relief) could lower your 'adjusted net income' to £43,662, potentially helping you avoid higher-rate tax.
Income tax bands and rates 2023/24 for Scotland*
Band | Taxable income | Tax rate |
Personal allowance | Up to £12,570 | 0% |
Starter rate | £12,571 to £14,732 | 19% |
Basic rate | £14,733 to £25,688 | 20% |
Intermediate rate | £25,689 to £43,662 | 21% |
Higher rate | £43,663 to £125,140 | 42% |
Top rate | Over £125,140 | 47% |
Source: HM Revenue & Customs
Reinstating Your Personal Allowance: For individuals earning over £100,000, whose personal allowance is tapered, pensions can be even more valuable. The tax-free personal allowance decreases by £1 for every £2 that your adjusted net income exceeds £100,000. Once your income surpasses £125,140, your personal allowance is reduced to nil. This means that some of your income could effectively be taxed at a substantial 63%. By making pension contributions, you can lower your adjusted net income, potentially reinstating your personal allowance and receiving an effective rate of tax relief of 63% on your pension contribution.
Annual Allowance Consideration: While pension contributions can offer tax benefits, it's essential to be mindful of annual allowance limits. For most individuals, the pension annual allowance equals 100% of UK relevant earnings or £60,000, whichever is lower. However, if your adjusted income exceeds £260,000, this allowance might be tapered. Exceeding your annual allowance could result in an annual allowance charge, which recovers any tax relief received on excess contributions.
*Figures differ for residents of England, Wales and Northern Ireland
Seeking Professional Advice
Understanding the intricate relationship between pensions, tax, and your overall financial situation can be complex. That's why our team of expert financial advisers is here to assist you. We'll assess your unique circumstances, provide guidance on pension contributions, assist in choosing the right pension fund, offer insights into other tax-efficient investment options, and keep you informed about any changes in pension rules.
Your financial well-being is our top priority at Cleveden Park Wealth, and we are dedicated to helping you make informed decisions that secure your financial future.
If you have any questions or wish to discuss how these insights apply to your specific situation, please don't hesitate to get in touch with us.
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