Guest contributor, Chris Mattingly, Director of the Contractor Co-op, explains the rules surrounding pension allowances and umbrellas.
Can my umbrella contribute more than the annual £40,000 allowance into my pension?
Yes, providing your umbrella will allow you to do this and you have sufficient allowances and earnings to support the contributions you wish to make.
There are four relevant allowances to consider when contributing to a pension.
The annual allowance
Providing you have not yet accessed your retirement benefits, the current annual allowance is £40,000 and represents the total amount you can contribute to defined contribution pension schemes and the total benefits that you can build up in defined benefit pension schemes in the current tax year.
If you exceed the annual allowance, you won’t receive tax relief on the contributions you have paid that exceed the limit and you will be faced with an annual allowance charge.
The tapered annual allowance for higher earners
Your annual allowance will reduce by £1 for every £2 of adjusted income exceeding £150,000, with a maximum reduction of £30,000.
Therefore, if your adjusted income exceeds £210,000 your annual allowance will be capped at £10,000 for the relevant tax year.
The carry forward allowance
The carry forward allowance allows you to make pension contributions in excess of your annual allowance, by making use of any unused allowances from the three previous tax years, starting with the earliest tax year. Any unused allowances before this period are lost.
To make use of the carry forward allowance you must have been a member of a registered pension scheme during the carry forward period and you will not receive tax relief on contributions in excess of your earnings in the tax year that the contribution is paid.
The example below shows how the carry forward allowance would be utilised for a contribution of £100,000 in the 2019 – 2020 tax year, assuming the maximum carry forward and annual allowance is available.
It’s important to understand that the 2019-2020 annual allowance is used first, followed by 2016-2017, then 2017-2018, and finally 2018-2019.
The lifetime allowance
Whilst there is no limit of the amount of pension savings you can build up, the lifetime allowance represents the limit on the amount of pension benefit that you can withdraw from your pension(s) either as a lump sum or as income without paying a tax charge.
The current lifetime allowance for 2019 – 2020 is £1,055,000.
For most people this limit won’t be a problem, but if you are unsure whether or not your current pension savings will exceed the lifetime allowance, you should speak to your pension provider, scheme administrator or seek financial advice.
If I have already accessed my retirement benefits, can I still contribute to my defined contribution pension?
If you have already flexibly accessed your retirement benefits and would like to continue contributing to your defined contribution pension, your annual allowance is reduced to £4000 and you can no longer take advantage of any carry forward allowances from previous tax years.
This article is intended to provide an overview of the key allowances to consider when contributing to a pension and should not be taken in whole or in part as financial advice. Anyone looking to contribute to a pension should speak with their pension provider, scheme administrator or financial adviser first.
For further information, please visit:
The Pension Advisory Service: https://www.pensionsadvisoryservice.org.uk/
About the Contractor Co-op
Approved and accredited by Professional Passport and APSCo, the Contractor Co-op offers an umbrella payroll service with the opportunity to make pension contributions using salary sacrifice.
To find out how pension contributions could improve the financial performance of your contract, please contact Chris Mattingly on 020 3468 0009, or visit www.contractor.coop.