What’s changing?

Two important changes to pensions take place on April 6 this year. Firstly, the amount you can save into pensions each year is being reduced. Secondly, the total value that an individual can build up within pensions over their working life is also being reduced.

The amount which can be invested into pensions each year each is called the annual allowance. It is currently set at £50k per annum, but it reduces to £40k in April.

The total value of pension benefits which an individual is allowed to accrue is called the Lifetime Allowance. This is currently £1.5m but it reduces on April 6 to £1.25m.

Exceeding either or both of these allowances can lead to very hefty tax bills.

Why does it matter?

£40,000 per year contributions and a lifetime “pot” of £1.25m seem like a lot of money to most people and therefore the Government’s decision to reduce the limits might seem like an irrelevance. However, for business owners and directors, pensions represent a fantastic way of moving company profits from the business into personal pension accounts whilst avoiding all corporation tax, income tax and National Insurance.

Any contributions (within the above limits) paid by an employer into a director’s pension plan are a deductible business expense and therefore exempt from Corporation Tax. Furthermore, the contribution is not deemed to be a benefit in kind to the director, so no personal income tax or National Insurance liabilities are generated. Therefore the money can be moved from the company to the director with no tax deductions of any kind. When used as part of business financial planning these pension limits are crucial and reducing them could hurt unless action is taken quickly.

What can be done?

By taking a proactive approach, there are ways of maximising company contributions before the new limits arrive. For example, any contributions made this year will still qualify for the current higher allowance of £50k but even more importantly, the current rules allow for any unused relief from the previous three years to be used too. This means it is possible for a company to shelter £200k of profits into a director’s pension account in the current tax year.

In fact, by careful use of Pension Input Periods (effectively the pension scheme year) it is possible to extend this maximum contribution even further. It is also possible in certain situations for an individual director to protect their personal Lifetime Allowance at the current £1.5m level. In most cases, the application needs to be submitted before the end of this tax year.