There are many opportunities for pension planning but the rules can be complicated. Furthermore the rules on the taxation of pensions will change very significantly in April 2006. The new regime will include a single lifetime limit (initially to be set at £1.5 million) on the amount of pension saving that can benefit from tax relief as well as annual limits on the maximum level of pension contributions (initially to be set at £215,000). Please talk to us if you would like further information on the new regime.
Tax relief is available on pension contributions at the taxpayer’s marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60. Indeed for some individuals, in particular where income consists largely of dividend income, the marginal rate of tax maybe in excess of 40%. It can be as high as 44.5%. For such an individual the true cost of a £100 pension contribution is £55.50. With the inability of the state to provide adequate levels of retirement pensions widely acknowledged, it is more important than ever to provide for a secure old age.
All individuals, including children, can pay personal pension contributions (not retirement annuity premiums) of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings (NRE).
The maximum level of contributions is determined by the taxpayer’s age at the start of the tax year. Earnings in excess of £105,600 (for 2005/06) are ignored.
Directors of family companies could, as an alternative, consider the advantages of setting up a company pension scheme. If a spouse is employed by the company consider including them in the scheme. Even with modest salary levels, significant benefits can accrue.