We are not authorised to give investment advice, so the following is merely advising on the rules in the UK for tax purposes. You should seek the advice of an independent financial advisor before making any investment decisions.
What can I pay into a UK pension scheme?
UK residents can pay personal pension contributions up to their UK earnings or their Pension Annual Allowance (see below) whichever is the lower. If their earnings are below £3600 then £3600 can be paid (£2880 net of basic rate tax relief). If you pay more than your earnings, HMRC should ask the pension company to refund any premiums overpaid. Employers can also contribute to a pension scheme and whilst there is no earnings restriction, the contributions made by an employer are taken into account when calculating the Pension Annual Allowance available.
Rental income is not earnings for pension purposes. So, if you are a UK resident landlord and not employed (including by your own trading company), self employed or in a trading partnership, you will be restricted to paying gross pension premiums of £3,600 per annum. If you own a company which only rents out property, it would be difficult to justify employer pension contributions unless you were carrying out significant work in managing a large portfolio.
If you are employed, your employer will usually have a duty to enrol you into a pension scheme under auto enrolment. Unless you do not meet the criteria or you opt out, you will have to pay a gross pension contribution of at least 5% and your employer will have to pay at least 3% of your salary between certain thresholds.
Non-residents (apart from Crown employees and their spouses) can only pay pension contributions into a UK pension scheme if they were a member of a pension scheme when they left the UK and within 5 years of their departure from the UK.
Types of pension scheme
These are employer sponsored schemes where the final pension paid is a proportion of the final salary at the date of retirement. The pension payable can sometimes be increased by paying additional voluntary contributions (AVCs) depending on the scheme rules. When calculating the Pension Annual Allowance used, it is the pension input which is taken into account rather than the actual amount paid by you or your employer.
The remaining schemes are usually defined contribution where the value of the pension paid is dependent on the value of the pension fund at the date of retirement. The pension can either be drawn as a drawdown or by purchasing an annuity.
Defined contribution schemes fall into the following categories:
- Personal pension schemes and Stakeholder pension schemes
These are usually policies taken out with a pension/insurance company investing in managed funds. You employer can also contribute into your personal pension/stakeholder scheme.
2. Self administered pension schemes
These are a variety of personal pensions where you have more choice in the investments that are made. It can be used to buy a commercial property and some business use a pension fund to purchase the property from which the business operates. The business does have to pay a commercial rent to the pension scheme. Pension funds cannot buy residential property.
3. Employer schemes
You employer could pay into your personal pension/stakeholder, have a group personal pension/stakeholder or its own pension scheme where the benefit depends on the investment performance.
4. Retirement annuity contracts (taken out before 1st July 1988)
These were replaced by personal pensions on 1st July 1988 but gross payments can still be paid into policies which existed on that date.
How is tax relief given?
Personal/stakeholder pensions receive basic rate tax relief at source for personal/employee contributions. So, if you pay a net premium of £800, this is a gross premium of £1000 (which is invested into your scheme) and the pension company/scheme would claim the £200 tax relief from HMRC. If you are a higher or additional rate taxpayer, the additional tax relief has to be claimed on personal pension contributions from HMRC either in your tax return or by making a claim. Some employers deduct the employee contribution from gross pay before it is subject to tax, in which case, further tax relief is not available as it has already been received. You can pay into a pension after you reach the age of 75 but you cannot claim tax relief. Employer contributions are always paid gross and the employer can deduct the premiums paid from their profits. Retirement annuity premiums are also paid gross and they are claimed as a deduction on a tax return or by making a claim to HMRC. If you believe that you were wrongly advised to contribute to a personal or stakeholder pension, and this has led to financial losses, you may have grounds for a Mis-Sold Pension Claim.
Money Purchase Annual Allowance
If you have flexibly accessed a defined contribution pension or a qualifying overseas pension that has had UK tax relief then you will only be entitled to the Money Purchase Annual Allowance (MPPA) which is £4,000. No unused allowance can be brought forward from previous years and you are not entitled to the Pension Annual Allowance.
Pension Annual Allowance
Subject to the earnings in the tax year and the MPPA described above together with the restriction below, the Pension Annual Allowance is normally £40,000 per annum. Pension contributions/inputs made in any year use the same year’s annual allowance before considering whether any allowance can be brought forward or carried forward. For any of the three years that you were a member of a UK pension scheme, you can use any unused Pension Annual Allowance using the earlier year’s unused allowance first.
Restriction where threshold income is in excess of £200,000 (£110,000 prior to 2020/21)
If your taxable income and total pension contributions are more than £240,000, the annual allowance will, in most cases, be tapered at the rate of £1 for every £2 that it is in excess of £240,000 until £312,000 when the maximum Pension Annual Allowance becomes £4,000. Prior to 2020/21 the Pension Annual Allowance was tapered between income plus pension contributions of £150,000 to £210,000 when the maximum Pension Annual Allowance became £10,000. This needs to be taken into account when considering unused allowances from previous years.
What if I exceed my MPPA/Pension Annual Allowance?
If you pay more than your MPPA (if applicable) or your Pension Annual Allowance (after deducting any unused allowances from the previous three years), then you have to pay a tax charge equivalent to the marginal rate of income tax relief which you have received.
You usually pay tax if your pension pots are worth more than the Lifetime Allowance which is currently £1,073,100 and will stay at this level until at least 5th April 2026. The Lifetime Allowance is considered when you decide to take money from a pension pot, turn 75 or transfer your pension overseas. To arrive at the value of your pension pot, defined benefit schemes are valued at 20 times the pension you get in the first year plus the lump sum which you receive and defined contribution schemes are the value of the pension pot at the relevant time.
The sum in excess of £1,073,100 is taxed at 55% if the pension is taken as one lump sum or 25% if the pension is taken in another way. If you die before you reach the age of 75 and have not drawn your benefits, the beneficiary will have to pay the lifetime allowance at the same rate.
When can I take my pension?
Apart from special cases, you cannot access your pension until you are 55 or over.
A defined benefit scheme will usually calculate the tax free lump sum and a taxable pension due to you when you retire. The pension may be a flat rate or index linked pension.
A defined contribution scheme is allowed to pay 25% of the fund tax free and the remainder can be drawn either by purchasing an annuity for the rest of your life or by making drawdowns as and when required or a combination of both. The sums which can be drawn will depend on the scheme rules but transfers can be made to more flexible platforms if necessary. Apart from the tax free lump sum, any drawdowns whether as an annuity or a cash withdrawal are taxable at your marginal rate of income tax.
Take care when drawing down pension because if you take it while you are a high earner or take our a large sum in one tax year, you could end up paying a lot in tax.
What happens when I die?
If you die after you have reached age 75, all withdrawals are liable to income tax on the beneficiary at their marginal rate. If you die before you reach age 75, most lump sums do not attract tax provided that they are paid out within two years of the pension provider being told of the death. Any pensions provided by the scheme are liable to income tax at the beneficiaries marginal rate. If the funds are worth more than £1,073,100 in total then there may be the Lifetime Allowance tax charge to pay as indicated above.
This is a brief summary and as already stated, independent financial advice should be sought before making any decisions.
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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