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10 reasons to pay into your pension before 5th April 2017 – Part 2

Following on from last weeks article, here I share 6 more reasons to invest into your pension before 05/04/2017.

5. Recover personal allowances
  • Pension contributions reduce an individual's taxable income. So they're a great way to reinstate the personal allowance.
  • For a higher rate taxpayer with taxable income of between £100,000 and £122,000, a personal contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.
6. Avoid the child benefit tax charge
  • A personal contribution can also ensure that the value of child benefit is preserved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other.
  • The child benefit, worth over £2,500 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There's no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces ‘income’ for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved, can lead to effective rates of tax relief as high as 65% for a family with three children.
7. Sacrifice bonus for an employer pension contribution
  • March and April is typically the time of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
  • The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay. And the reduction in your taxable income potentially means that any lost personal allowance may be recovered, or the child benefit tax charge avoided.
8. Providing for loved ones
  • The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members - there's typically no IHT payable and there's also the possibility of passing on funds to any family members free of tax for deaths before age 75.
  • You may want to consider moving savings which would otherwise be subject to IHT into their pension to shelter them from IHT and benefit from tax free investment returns. And provided you are not in serious ill-health at the time, any savings will be immediately outside the estate.
9. Dividend changes and business owners
  • Many directors of small and medium sized companies may be facing an increased tax bill following changes to the taxation of dividends. A pension contribution could be the best way of cutting their overall tax bill, while still receiving the same level of income.
  • And, of course, if the director is over 55 they now have full unrestricted access to their pension savings.
  • There's no NI on an employer pension contribution or dividend payment, but dividends are paid from profits after corporation tax AND may also be taxable in the director’s hands too. By making an employer pension contribution, this ensures that the tax that would have otherwise gone to HMRC boosts the director’s retirement savings instead.
10. Pay employer contributions before corporation tax relief drops
  • Corporation tax rates are set to fall from 20% to 19% from the financial year starting April 2017 with a further planned cut to 17% to effect from April 2020.
  • Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest.

Source – Standard Life

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