Your pension’s tax benefits

Hi, I’m Sarah Pennells and I'm the consumer finance specialist here at Royal London.

Hi, I'm Claire Moffat and I'm Royal London's pensions expert. And today we're talking about your pensions tax benefits.

Well, we've had a number of questions sent to us in advance and we'll be answering some of the most popular ones in the next 35 minutes or so. But we have left plenty of time for questions at the end.
So if there's a question that you'd like us to answer, then you can submit it using the Slido link. Now, as with all our webinars, if you've been to one of our before, you'll know that we can't answer a question.
It's about your specific circumstances or about the Royal London policy. Couple bits of housekeeping before we get going. We'll be recording this webinar and we'll be sharing a link to the recording with everyone who registered for it. And then finally, we had over 6200 people who've registered for this webinar. So there's probably a lot of people on the call if for any reason during the webinar, the stream freezes, just refresh your page. I've been told that should sort out the gremlins.

So Sarah we're talking about how your pension can save you tax. Where do we start?

Well, there's a lot we're going to be covering in this webinar. We'll be explaining about tax relief. We'll be telling you how much you can pay into your pension and still get that government tax top up. Will also be explaining salary sacrifice and also talking about a change that could affect some people in relation to tax free cash. But the end of the tax year, April the 5th, it's only a few weeks away now. So I think Claire, let's start with that. What is it and why is it so important?

Well, in the UK, the new tax year begins on the 6th of April every year. Now, normally this would be the time that any increases or decreases to tax and national insurance take place. This year well, it was a bit different and that's because we saw a decrease to National insurance for employees in January.So hopefully you've noticed a small difference in your pay already. Now, if you're self-employed, you had to wait until April for that. But actually we've had a second reduction which will kick in in April because of last week's budget. But tax year end is also important because it's the date that new allowances and limits apply from. And we'll talk about some of these during the session. It also means that before the tax year there can be some things some opportunities to take advantage of. If you haven't used up all of these limits. And we'll talk about how you might take advantage of some of these before the 6th of April.

And if you've ever wondered why the tax year end is in April the fifth.Well, apparently it dates back to 1752, which is the date when the end of the tax year was moved from the end of March. Enough of a history lesson.

Let's get on with the webinar.

Let's start with our first poll.

Now, the question is, do you know what tax relief is? So please vote now using the Slido link.
Just watching the numbers go up and down just now.
So it's an even split just now actually, yeah.
It's about 55% of people are saying that they know how tax relief, what tax relief is and how it works.
And about 44% saying no.
And it's it's interesting because this actually echoes some research that we did right at the end of last year.
Now, we asked 4000 people about pensions and tax and what they understood.
Now we found that only half of people who have a pension knew that they get tax relief on their pension contributions.

Now, we've also had a question which was submitted by James, who said he wants to know how tax relief works. So it's obvious it's not clear to everybody exactly what's involved. So I think it really is worth Claire spending a bit of time explaining how it works.

So first you're going to have a think about how tax relief works if you're employed or you're a sole trader and you would pay income tax. Now, the easiest way to explain this is with an example,
So let's look at a slide. If you pay £80 into your pension and you're a basic rate taxpayer, then the government will top that up by £20, and that’s the tax relief So that £100 goes into your pension if you're a higher or additional rate taxpayer, then you'll get the extra tax relief at the higher rate of tax now that would bring the total tax relief for a higher rate taxpayer. So in the right, here to £40. Now if you've got an additional rate taxpayer, that would be £45. But and it is quite a but here, you will either get that tax relief automatically or you might have to claim it back from HMRC. So if you're paying into an individual pension
or some types of workplace scheme, then you'll get the same 20% tax relief automatically. But you might have to claim the extra 20 or 25% back from HMRC. Now you can either do this by filling in your tax return if you do that or by phoning up. But please don't miss out on money by not doing this. And more and more people are becoming higher rate taxpayers. So it might not have affected you in the past, but it could now. And we should also see that in Scotland you might actually get more tax relief because that's because the rates of tax differ and higher earners in Scotland pay more tax, which means they get more tax relief.

So Claire think the key message is that if you're a higher rate taxpayer or an additional rate taxpayer, then it's really important to check whether you need to do something in order to claim back that extra tax relief because you could be losing out. Now, of course, if you're paying into a workplace pension, then as well as the tax relief, you'll get the employer's contribution going into your pension as well. But Claire you might get a different kind of tax relief if you're a company director. Explain that, please.

That's right. So if you're a company director and the company pays the pension contribution on your behalf, then it's saving the company corporation tax. So that's called corporation tax relief.
Well, now it's time for our second poll. So this is definitely not a test. We just like to know a little bit about people listening and watching today. So please let us know whether you're employed, not working, self-employed or retired.

Okay.
So again, interesting at the moment, the vast majority of people Claire are employed, a few retired and a small percentage self-employed.
So we'll give it a second or two just to settle down.

But I think that seems to to be the way and, you know, it is important to think about the differences between employees and directors when we think about how much can be paid into a pension.
Now we had a question from Alison, who wants to know what's the maximum that she can pay into her pension in the current tax year? So we're in 2023, 2024. So Sarah what's the answer?

Well, Alison, it's a really great question. It's a simple question. And the simple answer is that you can pay as much money as you want into your pension, but you probably know better than this. The answer, in fact, is a bit more complicated. So let's just have a look at the rules. Say you're employed, in which case you'll be being paid an income. You might be getting overtime, you might be getting a bonus. Now, the rules say that you can pay as much as you want. You can pay all your salary, all your bonus, all your overtime into your pension. Of course you would do that. You'd have no money left to live on. But you could do that now, you could also pay in any savings you have lying around as well. However, there is a limit on how much you can pay into your pension and get tax relief on the contributions and that limit
is a maximum of 100% of your earnings.
So if we take the example of someone who's employed and who's earning £30,000 a year, then what the rules say is they could pay the whole £30,000 into their pension. Now, as I said before, very few people are going to do that. But there may be situations where it's actually important to know what the rules say.
For example, you might have inherited some money and in which case you might want to pay a large amount into your pension. Now, if you are self-employed and you are working as a sole trader rather than through a limited company, in that case, you will pay yourself an income and again, the rules say that you could pay up to 100% of that income into your pension and you get tax relief on the contributions. Now, I gave an example a moment ago, someone earning £30,000 a year. Now, if you have a much higher salary than that, then there's another rule which could limit how much you pay and your pension, and we'll be talking about that in just a moment. But Claire, you mentioned earlier on company directors,
so if you take maybe salary in dividends, what is the situation there?

So if you're a director of a limited company, then normally what happens is you take a small salary and that's to make sure that you get state pension and other benefits, but you take the rest of your income in dividends, and that's because it means you would pay less income tax. But as we mentioned earlier, if you're a director, pension contributions would normally be paid by the company because that saves the company corporation tax. And it means you don't have to worry about those limits that we just spoke about. For people who are employed or a sole trader, there's no limit to the amount that company can pay into a director's pension if it's for the purpose of the business. But in reality, the company wouldn’t normally pay more than the annual allowance, or the director would have a tax charge. So more than that, and that's about annual allowance. Now, there's one other group that's worth mentioning, and that's those who have a business renting out properties, now there are really quite specific rules about pension
contributions for people who are landlords. So it's really worth taking financial advice on this.
Now we've had another question, which is from Amanda, who says, I've heard that you can have a pension if you're not working and don't have earnings. Is this correct? The answer is yes, absolutely. You can do have a pension and pay into it even if you have no earnings. Now, the maximum you can pay into a pension in this situation is £2,880 a year. Now, you will get that tax relief at the basic rate of 20% on top of that. So that means that £3,600 a year maximum could go into your pension in any one tax year. Now anybody can have a pension, even children can have one. Although if children do have a pension that it's quite often the grandparents who are paying into the pension on the grandchild's behalf to kind of help secure their financial future. One thing that's worth mentioning, though, which is if you are paying into a pension, then tax relief on your contributions stops once you reach the age of 75.So once you hit your 75th birthday, you can pay more money into your pension, but you wouldn't get tax relief on those contributions. Now, in reality, very few people are going to be working when they're 75, but it is just worth being aware of that rule.

I mentioned that the end of the tax year was a deadline for some things, and one of those things is annual allowance. I'm going to spend a moment or two talking about annual allowance. The first thing to say though is that the annual change will not affect most people in the UK, and that's because most people will be paying less into their pension than the annual allowance amount.

But it is worth explaining how it works, and that's because we get a lot of questions about it.
But don't worry if you don't remember all of what I'm about to say because we've got a guide called How Your Pension is Taxed and that explains annual allowance too.
So what is it?
Well annual allowance is the limit on how much money can go into your pension in any one tax year without paying a tax charge? It is not the maximum pension contribution you can make. And that's what Sarah just spoke about. You could still pay more into your pension if you wanted to and you could afford to and you had the earnings to support it, but you would have a tax charge to pay for the amount over the annual allowance. The annual allowance is currently £60,000 for most people and it increased from £40,000 last year. So with our earlier example of someone earning £30,000 a year, they wouldn't be affected by the annual allowance because their salary is significantly below their annual allowance level. But say someone earns £100,000 the most that they and their employer could pay into their pension in the current tax year without a tax charge would be £60,000. So it's a lot of money that you could potentially pay into your pension. So that's the annual allowance, but kind of linked to that is a tax concession and that's called carry forward. So what it means is that if you haven't used annual allowance from the 3 tax years before the current tax year, then it is possible to use that if you want to pay a very large amount into your pension. Again, this isn't going to affect most people. And if you're thinking of using this, then you should take financial advice. But again, it's worth explaining the basics about how it works and also it is only relevant, if you can pay large contributions into your pension and you have the earnings to match the amount of the pension contribution want to make, or perhaps should a company director in the companies paying the pension for you. So in the example I mentioned a minute ago, if that person earning £100,000 hasn't made any pension contributions in the previous tax year or the two years before that, then they would have carried forward developing. So their salary is £100,000, annual income is £60,000, and they’ve not made any pension contributions last year. So they could actually pay £100,000 into their pension without a tax charge because they'd be using £60,000 of annual allowance from this year and their £40,000 of allowance from last year as carry forward.
Now as I mentioned, financial advice is invaluable here, and I'd say especially so if you're a very high earner in a defined benefit scheme like one of the public sector schemes, because working at carry forward for these type of schemes isn't as easy as adding up how much you and your employer and have paid into your pensions. And if you want to find out more about how carry forward works, there's a really useful article on the independent and government backed money Helper website and you should know if the annual allowance will apply to you because you will receive a letter explaining this from your pension scheme.

Well, we've had another question and this one is from Ajay. He wants to know if I pay more into my pension, will that save me income tax? And again, I think it's worth explaining it with an example. So if we have a look at the slide here, we can see the amount of tax that somebody would pay if they lived in England and were earning £51,270 a year. Now if there's no pension contribution, they would pay £7,940 in income tax. But if £1,000 goes into their pension, then the income tax they pay goes down to £7740 and they have that £1,000 in their pension. So you're thinking, well, how does that work? Well, in the calculation, they were paying a higher rate of tax on £1,000 of their earnings. But workplace pension contributions get taken off your income before tax is deducted. So that means instead of paying tax on £51,270, they're paying tax on £50,270. And that's important because £50,270 is the higher rate tax threshold. So you are only taxed on income at the higher rate on income you receive above this amount. Now of course that's one specific example, but it is worth saying that even if you're not on that higher rate tax threshold, then if you pay more money into your pension, it could still save you tax.

So that explains how you save tax when you're paying into a pension, but Dawn has asked a slightly different question about saving tax. So she said, I contribute to a work salary sacrifice pension. I know this reduces my national insurance and my tax, but do I still benefit from that 20% contribution from the government? So Sarah before we answer that, I think we probably need to explain what salary sacrifice don’t we.

Yeah, absolutely. So with salary sacrifice and it's often also called salary exchange, you exchange a percentage of your salary in return for your employer paying all the pension contributions into your pension. Sounds a bit confusing. So let's again explain it with an example. Let's look at our pension policyholder who's called Sam now, there's a lot of figures on this slide. I'm really aware of this. The main thing I want you to concentrate on is Sam's position before and after salary exchange. Now, before salary exchange, Sam earns £35,000 a year. Now he pays tax and National Insurance on that, and he makes a pension contribution of £1,400. Now his employer pays £1,050 into his pension. His take home salary is £26,422. Now, if he's to choose salary exchange, it means his salary is lower just around £33,000. He makes no pension contribution at all, and that's because his employer is paying the pension contribution for him. And his take home salary is still £26,422. So you're thinking, well, why would Sam do this?
The answer is because of the tax and National Insurance saving, because using salary exchange, there's actually £3,251 going into Sam's pension compared to £2450 without salary exchange. Now, employers also sometimes pay in some or all of the national insurance that they save into your pension. But even if they don't, it is still a saving. Now more money can go into your pension from the same take home pay as in the example with Sam or you can have the same money going into your pension and have a slightly higher take home pay. Now it's worth saying, and Claire mentioned this at the start, that in the budget last week the Chancellor announced that the national insurance rates would be falling from April 6th. So that will slightly reduce the benefit of using salary sacrifice and it could mean a little bit less goes into your workplace pension. However, having said that, for most people, salary sacrifice, or salary exchange is worth considering. Now it is worth pointing out that salary exchange involves a change to your contract
and that has to stay in place for 12 months. If there are circumstances where it won't be in your interests, your employer should give you information about that. So, for example, you cannot use salary sacrifice or exchange if it means that you will pay would be taken below the minimum wage. Now, if you'd like to know a bit more about salary sacrifice, I've written an article which is on the Royal London website and will also link to it from the webinar page. If you receive a bonus through work, then your employer may offer bonus sacrifice or bonus exchange, and it works in exactly the same way.Okay, enough for me, I think.
Time for another poll.
We'd like to ask you if you're employed and we know the vast majority of you on the call are. Does your employer offer salary sacrifice? Do you know whether this is something that your employer offers?
So please vote now using the Slido link.
Okay.
So it's looking about sort of 58% do offer it.
30% so far, not sure.
About 15% saying, they don't offer. Yes.
I mean, this is interesting.
It's interesting that most employers do offer it is worth saying that there are some tax benefits to employers for offering this.
So for those people who just voted in the poll, whose employer doesn't offer it, or if you're not sure, it might be just worth asking them because it may be something we employ decides they want to do. Yes. So if we think about the question that Dawn asked, if your employer does offer salary sacrifice, and that's how your pension contributions are made, you don't get the tax relief added on. So it might not feel like you get that tax benefit, but you actually do. And that's because your pension contributions, well they're taken off income before tax is deducted.

Now, we've had another question from Claire, who says,I think I should increase my pension contributions, but is it worth it? I think the first thing to see is that we know that we're still being affected by the cost of living squeeze, and a lot of people continue to make some really tough choices about what they spend their money on. However, last year we did some workplace pension research with 6000 people. 4500 of those people had a pension.And what we found, while I think it surprised us, one in 20, so 4% told us that they had reduced their pension contributions in the last year, but one in ten, so 9% were thinking of reducing their pension contributions in the coming year. But where it gets interesting is that 13% of people said they'd increased their contributions in the last year, so about three times as many as had reduced their contributions and 15% of people, so more than one in seven were thinking of increasing their contributions. Now, you might be thinking, well, of course, a pension company is going to talk about paying more into your pension, but this is what our independent research is showing us. And being blunt, you could spend 20 or more years in retirement and I don't think any of us
would want to spend our retirement struggling financially. So if you are in a position to pay more into your pension, how much should you contribute and actually what difference would it make? Well, let's look at some figures on the next slide. Again, there's a lot of numbers here, and I'm just going to kind of talk through some of them.
So in this example, we've got Nisha. She started working when she was 20 to paying into pension then. She's now 40. She earns 32 and a half thousand pounds. And she's interesting in finding out what difference it would make to her retirement if she increased her contributions. So currently there's a total of 8% going into Nisha’s pension at age 67 if her pension contributions stayed at 8%, then she would have £253,819 and her pension pot. But if she decided to pay an extra 0.5% into her pension, well, at age 67, then she would have £262,940. So an extra £9,100. Now, we're basing these calculations on growth of 3% every year after charges have been deducted, but hopefully over time while returns aren't guaranteed. You could get a higher return. But what if she increased her pension contributions by even more so by 2% and the total going into her pension was 10% of her salary? Well, her pot at 67 would then be £290,335. So that's a difference of over 36 and a half thousand pounds. But but what does that difference actually look like on a monthly basis? And so you're probably thinking that it sounds good, but most people can't afford to increase their contributions. So again, let's delve into this in a little bit more detail.
So with that 8% that was being paid, there is £216.67 a month in total going into Nisha's pension.
So £81.25 from her employer, £108.34 from Nisha, and £27.08 from tax relief. If she increased by that 0.5%, then the same amount of employer contribution would be happening, the amount of tax relief would increase and Nisha would pay an extra £10.83 a month. If she pays an extra 2% a month, though, again, the employer contribution stays the same more tax relief is paid and Nisha would be paying an extra £32.49. So again, that is a lot of numbers, but what's the key point here? Well, it's not a huge amount of money every month to pay while Nisha is working, but that could make all the difference in retirement.

You may be able to get even more going into your pension, and that's through something called employer matching, now employer matching Is it kind of does what it says on the tin kind of pensions arrangement? What it means is that your employer will match your contributions pound for pound up to a certain limit.
Now, again, let's have a look. I have an example with a slide. So at the moment, under the automatic enrolment rules, the minimum that will be getting into your pension will be approximately 8% of your salary. You pay 4% of your salary there is tax relief at 1% and your employer pays in 3%. Now, that will be going into your into your pension every month. And for this calculation, we're assuming that you're a basic rate taxpayer. But with employer matching, your employer might match your contributions pound for pound up to a limit of, say, 6% of your salary. So if you paid it an extra 2% of your salary, then that would mean that 6% would be going in every month. But then some of that will be coming from the government in tax relief. But your employer would also be paying 6% of your salary. So I know this sounds a bit like a maths lesson, but it means 12% goes into your salary and the salary goes into your pension in total. So under the normal situation, 8% goes in with employer matching 12%, so half as much. Again, you might be thinking this sounds expensive, but I think it's worth just unpicking the figures here. If we look at an
example where on a monthly basis an employee is paying £80 a month, then there's a tax relief on top, taking that to £100 a month, the employer's matching that, so they pay £100.

So in all, £200 a month is going into a pension. But if the employee decides to do matching up to that maximum level of 6%, then they pay in £120, it's going to be £30 going in in tax relief and the employer pays in £150 as well. So that means there's £300 a month going into the pension instead of £200. But in order to get that extra £100 into your pension every month, you just need to pay £40.
So remember the point you made earlier on, which is if you pay more into your pension that it also reduces the tax you pay. And that's because your pension contribution is coming off your income before tax is deducted.
Ok Claire, That's the theory. But how can you pay more into pension if that's what you want to do?

So if you can afford to pay more into your pension, that are two ways to do this. So the first is to increase your the amount that goes in to your pension every month. If you're an employee, then take your employee benefits website or ask your HR department. The second way is to pay in a lump sum.
Now, we've just covered off the first one, but what if you want to pay a lump sum into your pension?
So how do you go about that?

Well, again, it's a topic that many people find quite confusing.
So the research that we referred to earlier on, we found that one in five people didn't know that you could pay a lump sum into your pension and reduce tax. Having said that, though, one in seven people said that they'd already done this, they'd already paid lump sum to the pension to reduce tax, and about another one in five said they were planning on doing this. Now, in broad terms, there are two options. If you want to make a lump sum or a single premium payment into your pension so you can pay that money direct to your workplace pension provider and then basic rate tax relief will be applied to your contribution. So let's take an example where you pay an £800 and there'll be tax relief on top. So £1,000 will go into your pension. Now, as we mentioned at the beginning, if you're a higher rate taxpayer, then you really need to claim back that additional tax relief so you don't lose out. And you do that normally by filling in self-assessment return. Now, if your employer offers bonus exchange, then you could pay in a lump sum using bonus exchange instead. Now that we have another question is from Bryn. He says, You are 63 years old, he's a high rate taxpayer. Should he be paying a lump sum into his pension? So we've just been talking about paying lump sums in and the benefits of doing that. And what it means for your tax. But if you're over the age at which you can take money out of your pension, which is 55, currently rising to 57 by April 2028, then there could be other benefits as well. And that's because you could potentially take out tax free cash. So again, let's look at an example. So say I'm 63 and I wanted £5,000 to go into my pension while I'd only pay £4,000 because the basic rate, the other £1,000 would be tax relief at 20% relief. So the amount going into my pension, £5,000, I pay in £4,000, but £5,000 is deducted from my taxed earnings. Because pensions, as we say, reduce the amount of tax you pay.
Now, if you're a higher rate taxpayer, it would only cost you £3,000 because you get that 40% tax relief. But if you wanted to straight away, you could take 25%. The tax free cash lump sum out. So that would be 1250 pounds. That's if you wanted to take out that tax free cash that is.
And it's worth just also a bit of a reminder to hear that if you live in Scotland, then you would be getting more tax relief. So that would make that even more tax efficient because you pay more tax, so you get more tax relief.

Now, you can ask another question by Charlie and he asks, What is the best way to make the most of a pension if you're self-employed or a business owner? Now, as we mentioned, self-employed could mean someone who is a freelance worker, sole trader and a business owner of a limited company. And not surprisingly, far more people who are self-employed had paid in a lump sum. Our research showed that those who do a self-assessment form 59%, had either paid in a lump sum or were planning to, and only 12% of this group of people didn't know that it was possible. Now, often that's because they wait until the end of the tax year to see how well the business is doing before they pay into a pension. So to answer Charlie's question, it's probably a good idea to wait until nearer to the end of the tax year, because then you'll have a good idea of how much you'll be able to pay into the pension, what your tax bill will be, and actually how the lump sum can help reduce that. So Sarah we’ve spoken about making payments,
but we've got another question. I think it's more about the admin and Debs wants to know, Well, you know, what else is involved in making extra payments into your pension?

Well, you mentioned earlier on, Claire, about the end of the tax year. so April the 5th, this year it's on a Friday, but the Easter weekend is the weekend before, so it may come around a bit faster than you think. And it is really important to think about the end of the tax year if you are making an extra pension contribution and to make sure that contribution goes in the right tax year. And it's particularly important if, for example, you're about to retire or you've been made redundant because you may not have earnings in the next tax year to support the pension payments that you want to make. It's also particularly relevant if maybe a higher rate taxpayer at the moment. But you know that in the next tax year you'll become a basic rate taxpayer, and that's because, you know, you'll want to maximize the amount of tax relief that you can get on your pension contributions. And Claire mentioned earlier on the annual allowance as well.
Now, many pension companies will let you pay contributions into your pension up until April the fifth.
But in order to make sure that money is allocated to your pension in the right tax year, as in the current year, then generally you'll have to make that payment a few days in advance. It is really important to check your pension provider's website and see what they say or you could miss out. Now we mentioned the budget a couple of times and some changes announced in the budget and there was another change that the Chancellor announced relating to child benefit and the high income tax charge. Now, this is something that received a lot of publicity in the run up to the budget. It may not feel like there's a link
between the child benefit tax charge and pensions, but there is. So bear with me.
Under the current rules, if you living with your partner and one of you is claiming child benefit, then as long as you each earn less than £50,000 a year, then you can claim the whole amount of child benefit and there's no tax to pay on it. But if one of you earns over £50,000 a year, then there's a tax charge to pay. Now the tax is imposed on a sliding scale so that if one of you earns £60,000 a year or more, the tax charge wipes out the amount of child benefit that you'd receive. Now, you'd normally have to pay that tax charge by fitting in a self-assessment return. Now, not surprisingly, thousands of families have decided
not to register for child benefit because they'll pay tax that actually wipes out the child benefit they receive. However, it is really important to register for child benefit because it could protect your entitlement to the state pension. The reason is if you're not working by registering for child benefit, you'll get national insurance credits towards your state pension up until your youngest child's 12th birthday. Now it is possible to register for child benefit, but to opt out of receiving any payment. Okay, back to the budget changes. What the Chancellor announced is that from April the sixth £50,000 lower threshold will increase to £60,000 and the £60,000 higher threshold will increase to £80,000. Now, the Government says that this will help around 485,000 families. Now, some of those families could decide that, whereas previously they'd not registered for a child benefit or not claim the payment. They will now do so. It's worth pointing out that you can backdate a claim for child benefit for three months. Now there's another
change that the Chancellor said the Government will be consulting on,and that's to address the issue of whether a couple could be living together, one of them claiming benefit and they could each earn, for example, £49,999 and there would be no child benefit tax charge to pay. But you could have a single parent who earns more than £50,000 a year and they would have to pay a tax charge.
So what the government is consulting on is whether there's a way of looking at household income rather than an individual income when trying to work out about how much tax people pay.
Okay. So those are budget changes.
Where it's relevant in terms of pensions, that there is a way that you could actually be earning more than £60,000 from April six when these thresholds change, or even 80,000 and still not have to pay a tax charge on the child benefit. How does that work? The reason is because the income threshold is not just based on your salary or your earnings. It's called something. It's based on something called adjusted net income. Your adjusted net income is your taxable income minus any pension contributions that are made before tax is deducted or any pension contributions where you get basic rate tax relief applied and also minus any charitable donations you make using gift aid.So it may be possible for you to pay extra into your pension to bring your earnings below that threshold. That way, you don't have to pay tax charge on the child benefit and you have the bonus of more money going into your retirement savings as well. Now, Claire, that's a change that the Chancellor announced in the budget last week. But there's another change coming on April 6th, not announced in last week's budget, though, but from a previous one. Explain that, please.

That's right. And as you mentioned, that change is happening soon. So you might have heard last year that something called the lifetime allowance was going to be abolished. I'm going to take a few moments to explain the changes. And I'll be honest, the changes are quite complicated and they won't affect many people. But for those people who are affected, it is important to understand it. And again, this is something that we are asked about a lot, but it is also covered in our guide on how your pension is taxed. So let's start with the position now and what the lifetime allowance is and how it works. So it's the amount of pension savings that you could have in a lifetime without a tax charge applying. And that maximum is £1,073,100. Now, although a few changes happened last year, the lifetime allowance will actually go by the 6th of April this year. So what does that mean? Well, currently what happens is you use up part of the lifetime allowance at different points in time. So any time you take tax free cash and you start taking a defined benefit income, you move money into drawdown and you take a cash sum or you purchase an annuity. It's also take on your age, 75 and on death. But from the 6th of April, it's only taking tax free lump sums. That becomes important. So not when you take pension income, for example. During your lifetime, you'll have a tax free cash allowance that you're able to take from your pension. For most people, that will be £268,275. Now, again, that's a huge amount of money. So these rules will they're not going to affect many people. But this limit applies to tax free cash and includes the tax element of cash, lump sums.
There's also something called the lump sum and death benefit allowance. Now, this is only important on your death or if you're very ill and you take something called serious ill health benefits from your pension. Now, this restricts the total tax fee lump sums to a limit for most people of £1,073,100. I know that number. Well, it probably rings a bell. I just mentioned it in terms of lifetime allowance. But what ever you have taken during your lifetime in tax free cash, well, that's taken off this. So. So if you have taken, for example, £200,000 of tax free, then on your death there would be £873,100 left of tax free lump sums. If your beneficiaries want you to take it as a lump sum, if you haven't taken any tax free cash, then they would have the full amount of £1,073,100. Now, any lump sums taken above that. Well it would mean that your beneficiaries would have to pay income tax. But remember, it's only in relation to lump sums. So, say you were really fortunate to have £2 million in pensions, for example. And you died, you're under 75. Your beneficiaries could actually see a whole amount of £2 million income tax free if they moved at all into drawdown and they didn't take it as lump sums. Now you could have a higher amount of tax free cash and lump sum and death benefit loans if you have something called protection from the lifetime allowance. Now this is something that you would have applied for at points in the lifetime allowance reduced What I would say, is that if lifetime allowance affected you or if the lump sum allowance, sum and death benefit allowance affects you, please take financial advice because it's really crucial that you get help with this.

Right. Well, thanks Claire
We've covered an awful lot in the last 30 or nearly 40 minutes or so, but we've had quite a few questions coming in. And I can see the one that's had the most votes is from Richard. And he wants to know, how do you claim higher rate tax relief? I think it's a really good question. In fact, it's been echoed by a couple of the other questions we've had. So what's the answer, Claire?

So I think and this is where it is quite difficult because it really does depend on how your scheme works and so it's really important that you find out what happens. And because if you're in a scheme where it's like a salary exchange scheme, you don't have to worry about claiming anything back because as I mentioned earlier, actually what happens is that kind of pension contribution is coming off before you pay any tax, so you will get your higher rate relief as part of that. But if you're paying individually into a pension that you've just set up yourself or you're paying into a personal pension that isn't a salary and exchange pension, then you might have to claim that back from HMRC. So make sure you do that and if you fill in a self-assessment return, it should be easy to do through filling in your return or you can phone HMRC, but do make sure check that. You can go back a few years as well. So if you haven't done it for the last five years, you can actually claim that back as well.

That's really helpful to know. So the next most popular question is from Scott, and he says. For the high rate taxpayers, do they get the high rate tax relief on all pension contributions or only the percentage above the 40 40% tax rate?
So, yes. So that's a really good question, too. It is only the part you're only going to get tax relief when you you would have paid tax on that. So, for example, in that example we looked to earlier for was £1,000. And then it took someone to be a basically taxpayer. They're going to get 40% tax relief on that thousand pounds. But see, the bigger pension contributions, they would have some at 20% and some 40% tax relief.So yeah, so that's really good question, but that's how it works.

Ok.

So another question, which is from Nick says, As my salary is less than £12,750, I'm not a basic rate taxpayer. So does tax relief apply to any personal contributions I make to my pension? Again, a really good question. We sort of covered it earlier on. Worth reiterating, though, isn't it? Yeah, that's right.

So you can still you know, we spoke about the fact that you don't actually need to be, you don't have to have any earnings. You can pay up to that £3,600 a year and you actually get tax relief and you only have to pay £2,880. So, yes, you can still get the tax relief and even if you're not actually paying tax.

Okay.

Ao another question, which is from Gordon, who says, Do individual one off contributions into a pension, i.e. not at salary sacrifice, also attract tax relief?

Yes. So, you know, if you're paying into an individual pension again, so maybe you've kind of you might be self-employed, you've set up yourself, then you're still going to get tax relief paying in that lump sum. But also, if you're saying into a kind of a workplace scheme, you want to pay a bit extra, then you're still going to get tax relief on that pension contribution. So yes, it doesn't really matter kind of how it's paid in. You're going to get tax relief.

Ok.

So we've got a question from Stephen who says, I finish paying national insurance contributions at 65, now 70 and still employed. How does this affect my pension tax position?

I think this is really interesting because also when the National insurance changes were announced last week, obviously, if you if you're over state pension age, you don't pay national insurance. Even if, like Stephen, you're working. So and did Stephen say in that whether he's in a salary exchange. No just that he is 70 and still employed. So you would still get tax relief because he's working but if it was a salary exchange scheme because you're over 65, you're not paying national insurance anymore, which is a benefit when you're if you are still working, you don't pay that you wouldn't if it was a salary exchange scheme, you're not going to see a reduction in national insurance because you're not paying national insurance, but you would still see the benefit of any tax relief. And we talked about an example earlier of someone who is over the age where they could access pensions, actually paying in more to your pension.
You've got the added benefit of if you want to, you can take some money out your pension, you do have to be careful though. And that's and we covered it before. We've spoken about something called the money purchase annual allowance and if you take more than tax free cash, you might be limited to the amount you can pay into a pension. So that limit is £10,000, so you have to be a bit careful if you are over the age where you can access pensions and you can't, for example, kind of pay in £40,000 a year to be taking £20,000 a year because you will have triggered that money purchase annual allowance.
But again, in our tax guide, there's information about the money purchase annual allowance, but certainly you can still be paying into pensions and taking out tax free cash. You just have to be careful. If you take any more than tax free cash or you take one of those cash lump sums.

Okay.

So we've got a question from Shuang, who says, I've been told by my employer that I cannot pay the majority of my earnings into my pension and in quotes, “as they must pay me the minimum wage”. So this goes back to something we talking about earlier on Claire, so is this true?

Yes, so it sounds like that’s a salary exchange scheme and you can’t salary exchange. So you can't reduce your salary below the minimum wage. So that is a legislative provision and that's to make sure that people aren't kind of sacrificing salary and then ending up with not enough to live on essentially. So I think that's probably what's happened there. And we did see really, it's up to your employer will keep you right about these things. Now, if you kind of have other income, for example, or you’ve inherited some money or things like that, you still could pay into a separate pension if you wanted to. Or with that, there's still options available, but salary exchange isn't allowed. And we mentioned that you know, salary exchanges is part of your employment contract. So it's governed by employment law as well. And so employers have to stick to the rules on this and there might still be other options.

Okay. So you've had another question. It's really good one. And this alludes again to what we were saying earlier on. I think it's in response to Amanda's question. So this question is from David, who says, Can I pay into a pension for my wife who isn't working? And if so, how much can I pay and will I get tax relief on my contributions? So we mentioned that anybody can be in a pension.

So we mentioned even children. But actually so if you've got a non-working spouse, perhaps your spouse has stopped working and they were looking after children full time, then it's a really good idea to still be paying into a pension for them, it is limited If you've not got any earnings to that £3,600 a year. So that's £2880. And then the government will talk up that difference to £3,600. But the tax relief is actually on the individual who's receiving it. So that tax relief will be added on. So you would if we still checks, we don't really write cheques anymore, but it's easier to kind of explain it. If you could write a check for £2,880 and it would be made up to £3,600, that would be going into the wife's pension in this example. And so it's kind of it's a great thinking of it sometimes pensions on a family basis. So that's going to add it might not seem like a huge amount, but it's going to add to that pension pot. And we really see that people have taken to kind of time out at different points in their lives then if you can carry on paying, then that's going to help on a kind of family basis when people are in retirement. So just to clarify that, David asked the question, if, for example, I don't know, but if David was a high rate taxpayer and he wouldn't be able to claim back any extra tax relief on the money he pays into his wife's pension. Okay. That's how the tax relief, even if it was a child, it would be that child. So someone else would be paying the money for them to. It would be kind of that child, who’s getting the benefit. Now, you could have the situation and sometimes we've seen it where you have grandparents paying for adult children and not maybe also children, grandchildren. Now, if you're if you're paying a contribution for someone who has earnings then it will be at that person who you're paying the contribution for. So say you had a child and you want it to be a pension contribution and they were earning £52,000 a year, then you could actually pay a contribution. they could be taken out of paying higher rate tax. So it benefits that person because they are at a higher rate taxpayer. But it's that individual who's receiving the money into their pension that the tax relief is attached to. So if that person's a higher rate taxpayer, they will get the benefit of higher rate tax. For the person writing the cheque again, I'm going to use these kind of things that we don't actually do anymore. So I've moved on and. There could be a benefit for them If things like if you've got an inheritance tax problem, it can do things like reduce your inheritance tax bill, potentially. But they're not going to see the benefit of any tax relief and they can't claim it back from HMRC. We've had a couple of questions that are very similar, so we’ll group them together. So one is from Ilinca, just so hope I pronounce your name correctly, and the other is from Francis. And basically it's does the annual allowance cover both employee and employer contributions? Yes. And when we think about a defined contribution pension. So the majority of pensions now, it's quite easy to know. My employer's paying £15,000 a year and I'm paying another £30,000 a year and you kind of know how much of the annual allowance you’re using up it's worked out definitely for defined benefit schemes and that mostly we think about public sector schemes. So it's not quite as easy to work as that and it's about the increase in the value over the year. But yes, it covers both of those.

And we've had another related question, which is from Megha who says, Can you clarify the annual allowance of £60,000 for pension? And she says, I see that's the maximum one campaign to pension and get tax relief. So that's absolutely right.

But just a. Well, I think we have to kind of disengage these two things. So it's the coverage at the beginning. What you can pay tax relief on and that's that or that's related to your earnings. Salary. And that's different to the annual allowance. So theoretically you could pay, you could be earning £200,000,
you could pay £200,000 in pension contributions and receive tax relief, but you would have an annual allowance charge on anything over £60,000 if you didn't have some carry forward available. So they're kind of separate but linked in some ways. And and so it's what really is happening with the annual allowance tax charge. It kind of takes away the benefit of tax relief, which is why most people think, well, there's not. Because it's the same as. You pay if you're at a higher rate taxpayer then the tax charge you would pay, your annual allowance tax charge. which you self-assess for, would be the same as the tax relief you would receive. So they're kind of linked, but not quite the same. But foremost people you would make sure that actually you're thinking. So you're thinking about kind of annual allowance and what you can pay, but also making sure, do I have the relevant earnings to support that, unless you are a director of a LTD company. So it wouldn't be unusual if you are a director of a limited company. It's not linked to your earnings, so you don't have to worry about that and having the earnings to support it. But you might have been building up a business for a long time. We see this often and someone wants to make the most of paying a lot in now because maybe they're thinking of retiring in a few years. And so they use this year and they use the previous year's carry forward. So you can see very large contributions going in,
but they're not in a position where they have to have earnings to support it. So it is quite complicated and they are sort of linked, but it's almost looking at kind of what, could I pay if you did have a lot of earnings, you might be restricted by the annual allowance because you wouldn't want to be a tax charge.

Great stuff.

Well, I think that's actually all we've got time for. We can't answer any more questions. I can see some coming in. Just worth saying we do have a look at the questions. We do try and answer them in future content. So if your question wasn't answered today, then we will try and get round to it and either articles will guide indeed future webinars. But we do have one last poll before we go, so please vote because we'd like to know what topic you'd like us to cover in a future webinar. Do please vote now in our poll.

Okay, So there's a lot of change here at the moment. How much do you need for your time and see the most popular? But it has been changing around quite, quite dramatically. So we will obviously wait for the figures to settle down and then we will make sure that we take your feedback into account when planning future webinars. Well, that's all we've got time for today and we will be sharing a link to the recording of the webinar in the next few days. But in the meantime, thank you very much for joining Sarah and I today.