Pension contributions receive tax relief and for higher rate taxpayers the relief obtained is 45%. The annual allowance in 2013-14 for pension savings is £50,000 and this will be reduced to £40,000 from 2014-15. You can also carry forward unused allowances from the previous 3 tax years.
Pension schemes have pension input periods and these may not coincide with the tax year. The pension savings allowance applies for the tax year in which the pension input period ends. For example if a pension input period finishes on the 31 May 2014, it will be the 2013-14 savings allowance of £40,000 that is applied.
The value of the pensions allowance depends on the type of pension scheme. In a money purchase scheme it is the amount of contributions put in either by you or your employer. In a defined benefit scheme it is the increase in value of your pension from the start of the pension input period to the end of the pension input period. Your pension scheme administrator should be able to tell you if your pension savings are over the annual allowance.
Pension savings above the total allowance will be liable for a tax charge. The tax charge depends on the level of your other taxable income.The amount that is in excess of your pension allowance is added to your income and taxed accordingly once personal allowances and income bands are taken into account.
The rules around the pension allowance can be quite complex depending on your circumstances and the type of pension you have so if you think your pension savings will be close to the pension allowance limit, then consider seeking more advice from your pension administrator, HMRC or your accountant.
Stakeholder pensions can be started for children, or non taxpayers (for example a non working spouse) and you can make contributions on their behalf which also obtains tax relief. The maximum annual contribution including tax relief is £3,600 per child or non taxpayer.
The level of your personal allowance depends on your age and income. In 2013-14 if you were born on or after the 6 April 1948 and have an income of less than £100,000 then your personal allowance is £9,440. The personal allowance is reduced by £1 for every £2 of income above £100,000.
Those born before the 6 April 1948 have a personal allowance of £10,500 and those that are 75 and over have a personal allowance of £10,660 as long as their income is below a set limit. The limit is £26,100 in 13-14, the allowance is reduced by £1 for every £2 of income above this limit, The age related allowance is not reduced to below the standard personal allowance unless income is above £100,000. Eventually the higher age allowance will be phased out as it has been frozen until the standard personal allowance has reached the same level.
Blind people can claim an extra personal allowance of £2,160 and there are no age or income restrictions. Married couples, or partners in a civil partnership have an allowance if one partner was born before 6 April 1935. The level of allowance depends on the level of income and the date of the marriage or civil partnership. See http://hmrc.gov.uk/incometax/married-allow.htm for more details.
If you run a family business, consider ways to maximise the use of your spouse’s or other family members’ personal allowances by employing them in the business. Care needs to be taken to ensure that employment complies with PAYE requirements, other legislation and that the employment can be justified for commercial reasons.
For those of you that run your own business consider your business structure. Many businesses start out on a sole trader basis as it is straightforward and simple, but then as profits grow it may become more beneficial for commercial and tax reasons to change.
Family members who work within a business can be included in the ownership structure via a partnership arrangement, this splits the profits between family members and allows each partner to make full use of their personal allowances. The business has to complete a partnership return each year and the partners have to complete self assessment returns which include their share of the business profits.
A limited liability partnership is one step further than a general partnership. It is a separate legal entity in law and limits the liability of the partners as for a company, but the partners are still taxed as individuals on their earnings.
Many business including family run business form limited companies. This gives you more control on how and when you are taxed. You can take money out the company through a salary to make use of your personal allowances and to qualify for the state pension. Then the rest of your profits can be left in the company to reinvest after corporation tax, or taken out as dividends which are not subject to national insurance. The corporation tax rate on small company profits is 20% for 2013-14.
There are other advantages in forming a company despite the extra administration costs. The liabilities of the owners are limited and they will not be personally liable for losses made by the company, companies often carry more credibility with the public and suppliers and your company name is protected once registered with Companies House. A company structure can make it more straightforward to sell on the business or to obtain funding for expansion or development.
Contact an accountant to see if a change in structure would work for you and to see some initial calculations based on your earnings and profits.