Things you should know about pension allowances
Think of pensions and what comes to mind might not inspire much excitement. But getting them right is crucial in making sure you get the rewards from your business you deserve.
Not only do pensions offer security in retirement and allow you to continue the lifestyle you have created, but they also offer one of the most tax-efficient ways to extract money from your business.
Pension allowances are key to this, but what are they? How do they work? And what do you need to know?
What is annual pension allowance?
A pension allowance is a total that you or your employer can pay into a pension across the tax year.
If you contribute more than this amount, this could cause you to receive a tax charge.
The annual allowance is a limit on how much pension money you can claim tax-free. The annual allowance is currently £40,000.
You can carry forward unused annual allowances from the 3 previous tax years.
You will pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1,073,100.
If you choose to put in or claim a higher amount of pension money, you can, but you will have to pay tax on this.
Tax for pension allowance is based on:
- your contributions
- employer contributions
- contributions from a third party
What if I am below or above the limit?
If your earnings are lower than £40,000 you are eligible for tax relief up to the amount you earn. If you earn less than £3,600, you can pay into your pension up to £2,880 and you will still be eligible for tax relief.
If you exceed the annual allowance in any one tax year, you will have to pay tax on any contributions which exceeded the limit. You will also have to pay an annual allowance charge.
If you need advice on pension allowances, you should seek guidance now to avoid paying extra tax or missing out on unused amounts.
For advice on related matters, contact us today.