Higher earners must act now to maximise pension contributions

The Chancellor may have spared higher earners from cuts to their pension tax relief in his recent Autumn statement but this is likely to be nothing more than a stay of execution. 

The government has been conducting a comprehensive review of pension taxation, and while no one can be sure, it is anticipated that the Treasury will now produce its final response in next year’s Budget. The outcome is expected to be cuts to the tax breaks currently enjoyed by higher earners.

In the short-term, this means that higher earners should look to make the most of the current rules while they still can by increasing their contributions this tax year. I’d urge companies and individuals to act sooner rather than later.

Pensions can be a complex area to navigate. We already know that new rules will come into force in April 2016 regarding the amount that higher earners can contribute to their pensions and claim tax relief.

This particular change was announced in the July 2015 Budget but there is still time to take advantage of the tax opportunities available.

The headline change is that the annual allowance for pension contributions is being gradually reduced from £40,000 to just £10,000 for higher earners whose income exceeds £210,000.

The changes take effect from 6 April 2016 so, again, now is an opportune time to maximise pension contributions and the tax relief that can be achieved on them. 

On incomes of more than £150,000 this year, up to 45% tax relief is available on pension contributions.

There is also the opportunity to put an extra £40,000 into pensions before 6 April. The £40,000 allowance usually applies across a whole tax year but there is a second chance to put a further £40,000 in during the six-month window of July 2015 to April 2016.

Not only that, unused allowances from the last three tax years can be carried forward and paid in to pension pots.

The forthcoming changes represent a significant shift in pension policy. Up to now, pension tax relief has been one of the most generous tax breaks available. 

Many leave it to later in the tax year to make their pension contributions but the imminent changes should focus minds and trigger conversations with financial advisors.