MAKING PENSIONS SIMPLE

 Tax relief on pension contributions

Tax relief available for personal contributions is the higher of £3,600 (gross) or 100% of relevant earnings. Any contributions in excess of £60,000, whether personal or by the employer, may be subject to tax charge on the individual.

The limit may be reduced to £10,000 once money purchase pensions are accessed.

Where the £60,000 limit is not fully used, it may be possible to carry the unused amount forward for three years from previous years (£40,000 annual allowance in previous years)

The annual allowance is tapered for those with adjusted income over £260,000. For every £2 of income over £260,000 an individual’s annual allowance will be reduced by £1, to a minimum of £10,000.

Employers will obtain tax relief on employer contributions if they are paid and made ‘wholly and exclusively’ for the purposes of the business. The tax relief for large contributions may be spread over several years.

Pensions automatic enrolment

Auto enrolment places duties on employers to automatically enrol ‘workers’ into a work based pension scheme. Employers are required to automatically enrol all ‘eligible jobholders’ into a qualifying pension scheme and pay pension contributions on their behalf.

Employer minimum contribution: 3%
Total minimum contribution: 8%

Where the employer does not make the total minimum contribution the employee is obliged to pay the balance.

State Pensions

The basic State Pension is a regular payment from the government that an individual may be entitled to when they reach ‘State Pension Age’.

The basic State Pension depends on the number of years an individual has paid National Insurance or got National Insurance credits, eg while unemployed or claiming certain benefits.

To receive the basic State Pension an individual must have paid or been credited with National Insurance contributions (NIC).

In 2016 the State Pension was reformed into a single-tier new State Pension. In order to benefit from the full amount the individual will need 35 years, rather than the previous 30 years of NIC or credits for the full amount, with pro-rating where 35 years is not achieved. You will usually need 10 qualifying years to get any State Pension. The amount an individual receives can be higher or lower depending on their National Insurance record. It will only be higher if you have over a certain amount of Additional State Pension.

Currently an individual may also be entitled to the Additional State Pension. How much an individual gets depends on the number of qualifying years of NIC, the amount of earnings and whether the individual has been contracted out of the scheme.