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. Pensions have received a particularly bad press in recent times for a variety of reasons. However the tax relief on pension contributions, still at 40% for a higher rate taxpayer, is attractive. Pension planning therefore forms an important part of a year end tax planning review.
Employees who are members of a company pension scheme obtain tax relief on additional voluntary contributions to the extent that, together with the employee’s other contributions, they do not exceed 15% of remuneration.
The self-employed or those in non-pensionable employment obtain tax relief for payments under personal pension contracts. Individuals can contribute £3,600 (gross) per year with no link to earnings. This makes it possible for non-earning spouses and children to make substantial contributions to pension schemes. Further contributions can be made depending on age and earnings levels, generally referred to as net relevant earnings. Earnings in excess of £105,600 (for 2005/06) are ignored.
Different rules apply to those paying old style ‘retirement annuity premiums’ under policies that started before 1 August 1988.
Family company directors should consider making additional employer’s contributions to existing company pension schemes. If a spouse is employed by the company, consider including them in the company pension scheme or setting up such a scheme for the purpose. Even where salary levels are modest, such a scheme can provide significant benefits.