This tax year end is even more critical than normal as it is also accompanied by a reduction in the Lifetime Allowance and a potential reduction in the Annual Allowance.Some of those affected by the Lifetime Allowance reduction may seek to apply for Fixed Protection, but this will mean that no further pension contributions can be made post 5th April, so a "final" contribution before then may make sense. Or some may want to make a contribution now to maximise the benefit of securing Individual Protection.
Similarly, those high earners who will see their future Annual Allowance reduce may look to utilise not just this year's higher allowance, but also some or all of the unused allowance from the last 3 years which can still be carried forward.Then, to further compound things, it has been confirmed that the Budget on the 16th of March will include the conclusions from the recent consultation on changes to pension tax relief. Currently when a personal pension contribution is made, tax relief is received at the contributor's marginal tax rate, typically 20% or 40%/45%.
However, it is now widely anticipated that the Chancellor will announce a move to a flat rate of tax relief. Whilst the potential new rate is unknown, it is highly likely to be set at a level that is an increase for basic rate (20%) taxpayers, and a decrease for those paying 40% or 45%. It will take some time for the pensions industry to implement such a change, but it would not be surprising if the Chancellor announced immediate measures to block or restrict any last minute dash for higher rate relief.So, the list of reasons to consider a year end pension contribution is much longer than normal:
- Usual year end management of overall tax position;
- Final contribution ahead of applying for Fixed Protection, or in order to maximise the benefit of Individual Protection;
- To fully utilise Annual Allowance carry forward ahead of a potentially reduced Annual Allowance from April;
- Nervousness about the potential move to a flat rate of tax relief, and the effective reduction in tax relief provided to higher rate taxpayers
Not only is the above list longer than normal, but, for those eligible for 40% or 45% tax relief there is a case for making any contribution prior to the 16th of March rather than the 5th of April. If you are going to make the contribution anyway, then doing it prior to the 16th of March will remove any ambiguity about the rate of tax relief that the contribution will receive.
Ideally, plan now and seek advice as required so that you can make an informed decision.