Pensions – A Summary (Part 2)
In Part 2 (see part 1 here) of our summary on pensions, we look at what tax implications and savings you can take advantage of.
Any pension contributions that you make serve to increase the basic rate band of tax (the amount you pay 20% tax on), and subsequently increasing all the further thresholds. For those who are liable to higher or additional rate tax (40%/50%) this is very advantageous, and especially so for those who are earning between £100,000 and £116,010. When £100,000 is reached normally, your personal allowance starts being deducted, by £1 of every £2 over the threshold (so by the time you are earning £116,010, you have no tax-free allowance for 2012/13). By making pension contributions, you can push the threshold past your earnings figure, saving you both the higher rate tax you would have paid (up to 40%!), as well as getting your full personal tax-free allowance.
Once you are eligible to receive income from the pension, you will pay tax on it. However in most schemes, you can take withdraw 25% of the value of the pension tax free, which is a substantial saving.
As well as the straight income tax savings, any gains made by pensions are exempt from Capital Gains tax. This can be especially advantageous for those who have invested in a SIPP.
Let’s take an example: John works as a contractor through his own company (he is the director and sole employee). He decides to open a SIPP through the company, and make annual contributions to this, of £50,000 (the maximum annual allowance).
- Any pension contributions made by company pension scheme are an allowable expense for corporation tax purposes, which lowers the corporation tax he will pay.
- The SIPP can invest in commercial property. If they were to invest in, for example, the building where John’s office is, then any rent he would pay on that office would be contributed to the SIPP. Furthermore, if the SIPP decides to sell the property, there would be no capital gains tax to pay.
The tax advantages here are significant, and it is easy to set up.
For more specific advice for your exact situation, consult a chartered accountant or financial advisor.