6 Reasons to Pay into Pensions Before 6 April 2024
Published / Last Updated on 10/02/2024
With the abolition of the Lifetime Allowance LTA (£1,073,100) i.e., the maximum you can build up in pensions funds during your lifetime being abolished from 6 April 2024 (tax year 2024/25) and the fact that there is a 0% tax charge currently for exceeding the LTA in this tax year 2023/24, there are plenty of reasons, not just for those with pension funds below the LTA but for those with larger pension funds exceeding the LTA, to consider recommencing paying into pension funds again or rejoining company workplace pensions that you may have opted out of.
That said, with an election looming, Labour have vowed to bring the LTA back although we are not sure how easy that would be given many may ‘crystalise’ i.e., take their pensions in full this year, when there is a 0% excess LTA tax charge or next year when the LTA disappears altogether. How will Labour ‘police’ this? We think it will be quit hard without yet more transitional arrangements and a new raft of Primary Protection, Enhanced Protection and Personal Protection options for this that did take benefits from 6th April 2023 through to 5 April 2025.
Reasons to Pay In Before 6th April 2024
No Excess LTA Charges
As mentioned above, if you are near the LTA threshold or if you have suspended paying into pensions or opted out of your workplace pension, you may wish to consider starting up again given the excess over LTA charge is 0% and is abolished on 6 April 2024.
- It may even be that you have LTA protection via primary, fixed or personal protection as you exceeded LTA in the past but secured protection at higher levels and stopped accruing any further pension rights. With the LTA disappearing, you may wish to give up your previously secured protection and contribute again.
- Previously secured enhanced protection for higher tax-free lump sums and lump sum death benefit allowance (LSDBA) will have their limits set for uncrystallised pensions (not taken any benefits) as at 5th April 2024. Therefore, by recommencing pension contributions, you will still keep/retain your Enhanced Protection for tax free cash, but you can now still build up more pension funds to increase your LSDBA to benefit your loved ones on death with the balance of you pension fund paid to them (outside your estate) (but not your tax free cash entitlement which will remain frozen at the Enhanced Protection level as at 5th April 2024).
Annual Allowance increased last year to £60,000 combined employer/employee or self-employed contributions. The maximum that can be paid into pensions is the equivalent of the lower of
£60,000 pa or your yearly net relevant earnings. This gives huge scope for pension contributions to
- Maximise tax relief – tax relief is granted at your highest marginal rates of tax.
- Protect personal allowances – If you earn £125,140 or more, you will lose your personal allowance (£12,570 pa meaning more tax paid. If you earn over £125,140 you now pay income taxes at 45% in England, Wales and Northern Ireland. By making a private pension contribution of say £25,141 gross, this will take your net relevant earning down from £125, 140 to £99,999. This means you recover your personal allowance £12,570 and also stay in the 40% tax bracket meaning you pay much lower taxes.
- If you earn £60,000 or more, you lose your child benefit entitlement. By making a private pension contribution of £10,000 gross, your net relevant earnings fall from £60,000 to £50,000 meaning you are back in the 20% basic rate tax band area as well as recovering your child benefit payments.
Carry Forward of Annual Allowance is where you can bring forward unused pension annual allowances from the previous 3 years tax years.
- For example, if you earned over £60,000 this tax year and £40,000 pa for the previous 3 tax years but made no pension contributions (but you did have a pension in force), you can pay in up to up to £60,000 this tax year and £40,000 for each of the previous 3 tax years. That’s £180,000 of potential tax relievable contributions this year. Note: You cannot pay in more than you have earned this year i.e., to pay in £180,000, you must have earned £180,000 this year.
Sacrifice Income or Bonus
If you are a higher earner or if you have earned a bonus that will mean a big tax bill, it may be worth talking to your employer about sacrificing income or a bonus to be replaced by an employer pension contribution to boost pensions, save employers and employees national insurance as well as reducing your own personal tax liability.
Pensions to Reduce Corporation Tax
It may that your employer (or more likely your own limited company business) may have scope to pay into a pension for you without the above salary restriction and given that the main corporation tax rate increased from 19% to 25% this year, businesses may look to pay larger sums into your pension to reduced corporation tax or even get theme below the £50,000 profit threshold where corporation taxes remain at 19%.
Self-Employed Transitional Year End
Until this tax year 2023/24, self employed people filed tax returns based upon their trading year. This has now changed so that all self-employed persons have their trade/tax/reporting year end of 5th April 2024.
- This may mean that a self-employed person has an extended trade year this year of more than 12 months to then align up to 5th April meaning a larger tax and national insurance bill (although there are provisions to spread this over 5 years).
- That said, consider making pension contributions before the tax year end to reduce higher income levels to a lower level that may benefit you in the same that it does for employees making contributions, securing tax relief say at 40%/45% or recovering personal tax allowances or recovering child benefit entitlement.
