Opinions vary on the benefits of pensions. With falling annuity rates, some no longer regard them as the security for retirement that they used to be, preferring alternative strategies such as ISA’s, buy-to-let properties and personal investment portfolios. But, as with everything in life, it is a balance and a pension plan should be considered as a part of a balanced financial plan for later life. The benefit of a pension is that they carry tax benefits.
Tax relief on pension contributions is available on the lower of 100% of annual earnings or a £40,000 annual allowance. You can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.
But beware of the recent change. From April 2016 the £40,000 annual allowance is reduced if your income exceeds £150,000. If this is likely to affect you, some calculations will be necessary to avoid any tax charge, as any contributions over the limits will be subject to Income Tax at the highest rate you pay.
As you will know, barristers are able to practice through limited companies where the rules are different.
Employers’ pension contributions can be claimed as an allowable business expense subject to the usual rules requiring expenses to be wholly and exclusively necessary for business purposes being met. If the pension contribution in a particular year is larger than HM Revenue Customs think reasonable, the tax relief may need to be spread over a period of up to four years.
No employer’s nor employee’s National Insurance contributions are payable, so tax relief on pension contributions is more generous if the employer makes the pension contribution, rather than the employee. However, employers’ pension contributions do count towards the individual’s annual allowance. If the employer makes pension contributions that take total contributions over the allowance, the individual is taxed at their marginal rate of income tax.
All employers are being required to comply with the Auto Enrolment legislation requiring them to provide a workplace pension although there are some exceptions for “one-person” companies.
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