There has always been room to use your tax allowances when it comes to pension planning as a contractor and clearly believing these could do with a boost, chancellor Jeremy Hunt revived these at Spring Budget 2023 with quite jaw-dropping vigour StatesAngela James of Yolo Wealth.
Reform that those contractors hit by other reforms should welcome
Out of nowhere from Mr Hunt came some outright pension giveaways, chiefly with the abolition of the lifetime allowance on pensions, and even better for many, an increase in the annual pension allowance from £40,000 to £60,000.
If you are considered a higher earner this could be great news for you, whether outside or inside IR35 there’s opportunity here to get some of that tax (or get it back if you’re inside IR35). Will a £60k-a-year potential pension pot last forever? Only time will tell. Indeed, in the coming few years there may at least be changes to the annual allowance, but my suggestion is to try and make the most of it while it’s available.
So, what were Spring Budget’s pension changes?
Since April 6th 2023, the following changes apply:
- An increase to the annual amount you can save into pensions from £40,000 to £60,000.
- An increase to the money purchase annual allowance from £4,000 to £10,000.
- The amount very high earners, those with income over £360,000, can now invest up to £10,000 (known as the tapered allowance)
- Nobody will face the lifetime allowance charge of 55% — rather, individuals will now be taxed at their own marginal rate instead of the equivalent excess.
What is the new pensions allowance and what does it mean for you?
Every UK taxpayer has an allowance available to them every year that they can save into a pension of their choice. From late next week, that allowance has increased to £60,000.
In a few cases, this £60k total could even be higher if you have ‘carry forward’ available to you. For the self-employed, contractors or company directors, ‘carry forward’ can be a vital allowance that is particularly useful when you have income available that you have been reluctant to draw, due to increasing your tax liabilities.
For limited company owners in particular, a pension allowance can be beneficial in reducing corporation tax liabilities. This is another deadline to be mindful of if you’d like to avoid a nasty sting in the shape of a penalty — your company year-end.
What about umbrella company contractors and pensions?
Pension tax relief is available to you at your highest rate of tax and is considered one of the single most efficient ways of reducing your tax burden in any given year.
For those contractors inside IR35, you may have the opportunity to do what’s called ‘salary sacrifice.’ This is a way — if your umbrella company allows it — to invest straight into a pension before tax and national insurance. It can represent a significant saving since you are responsible for both employer and employee national insurance.
Back to Carry Forward…
‘Carry Forward’ will allow those individuals who are eligible to go back up to three tax years and permit them to use up their unused allowances. That could be you, on the condition that you were a member of a UK-registered pension scheme in those tax years which you wish to use.
Reach out for tailored pensions advice, in a free consultation
If you would like to discuss any of the above, we at Yolo Wealth are qualified and ready to assist. Just let us know and we would be happy to arrange a call for you to ensure Spring Budget’s pension changes start working for you when you stop working.
eligibility criteria will apply.
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