Use your pension annual allowance by April 5th 2024, or don’t - and lose the tax relief forever!

It's a busy time as 2023-24 draws to a close but contractors -- don’t overlook the opportunity to maximise your tax-efficient savings before the new fiscal year commences, writes Hrishi Kulkarni, managing director of iSIPP.

With the end of this current tax year fast-approaching on April 5th, it’s crucial to explore all your options – and the pension annual allowance is one that may have slipped your attention.

There’s not a lot of time left. But let’s look at how to optimise your pension contributions and capitalise on tax relief in advance of 2024-25 commencing on April 6th because, if you don’t you’ll lose the last 12 months of tax relief forever!

What is the pension annual allowance?

The pension annual allowance denotes the maximum sum you can contribute to your pension each year.

Anything surpassing the annual pension allowance will incur substantial tax penalties.

The maximum allowance stands at £60,000 for the current tax year, ending on 05.04. 24. So, you can contribute up to 100% of your income up to a maximum of £60,000 on or before April 5th and avail tax relief on your savings.

Why is the pension annual allowance important?

Contributing to your pension is a fundamental aspect of retirement saving. The pension annual allowance serves as a crucial mechanism enabling you to leverage the tax benefits of saving for retirement – and some limited company contractors might feel like tax benefits are increasingly a thing of the past! By contributing to your pension up to the annual allowance, contractor-directors can not only benefit from valuable tax relief but also augment their retirement savings.

How does it work?

Upon contributing to your pension, you receive tax relief on the saved amount. Thus, if you are a basic rate taxpayer, you receive £20.00 in tax relief for every £100.00 you contribute.

Essentially, this constitutes a refund on the income tax previously paid on the contributed amount. Higher-rate taxpayers may also claim additional tax relief.

By contributing as much as possible (up to £60,000) to your pension before the tax year concludes, you can avail this tax relief and mitigate your overall tax liability to HMRC.

For instance, by contributing the maximum annual allowance of £60,000 (but no more than 100% of income), you could secure an additional £24,000 in tax relief as a high rate tax payer (notably £12,000 at source and £12,000 via self-assessment).

Alternative avenues to maximise pension savings

If you are an entrepreneur or self-employed, you will likely relish the autonomy over your choices, and understandably so!

With a Self-Invested Personal Pension (SIPP), you can readily select your own investments, with returns being virtually tax-free.

As a pension partner to many PSC contractors, we’ve made the conscious decision to offer an array of investment options, to cater for diverse investment styles. Additionally, the funds are managed by leading providers such as BlackRock and Schroders, instilling confidence that your money is in capable hands.

How to utilise your pension annual allowance by April 5th and not a day later…

If you have yet to utilise your pension annual allowance, you still have time before the tax year concludes.

Contributions can be made to your pension either through your employer’s pension scheme or a personal pension plan like iSIPP.

However, if tax-efficiency matters to you, it is imperative not to exceed your annual allowance.

Exceeding the annual allowance will incur tax charges on the surplus amount. Furthermore, if you have commenced drawing from your pension, your annual allowance is reduced to just £10,000 a year. This threshold is the ‘lower allowance,’ also known as the ‘money purchase annual allowance.’

Still reading!? Go use your pension annual allowance by April 5th 2024, or don’t - and lose the tax relief forever!

In summary, the pension annual allowance for limited company directors represents a potent tool for saving and investing in a tax-efficient manner, in a world where their tax-efficiencies are increasingly few and far between.

By seizing the available tax relief before the tax year concludes, you can significantly bolster your pension. Therefore, if you have yet to maximise your contributions, the time to act is now!

Disclaimer by the author, iSIPP: The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. You should be aware that past performance is no guarantee of future performance.