“How much should I contribute?” is a common question from employees and self-employed and even more at the end of the tax year (this tax year ending on the 5th April 2021).
This article explains pension allowances and how they work on a practical level; to help you decide how much to pay into your pension scheme.
Pension contribution limits
You can contribute any amount on your pension, but you only get tax relief on contributions up to your salary or £40,000 in a tax year, whichever is lower. This is called your annual pension allowance.
Your annual allowance applies across all your pension schemes. It includes all contributions that you, your employer or anyone else pays on your behalf.
There are some exceptions. If your income is over £240,000, you have a smaller pension allowance (Tapered Annual Allowance). The annual allowance will reduce by £1 for every £2 that your adjusted income exceeds £240,000. The minimum reduced annual allowance is £4,000.
How tax relief works
Pension tax relief is equivalent to 20% of the total contribution; if you’re a higher rate taxpayer, you can claim an additional 20% or 25%. You get it in one of two ways: as extra money in your pot for when you retire (the most common) or as a tax reduction now.
So if you’re a basic rate taxpayer, this is how it works:
|Tax top-up from HMRC||£20|
|Total amount that goes into your pension||£100|
Higher rate taxpayers (employees earning over £50,000 per year) can claim an extra 20% or 25%.
Carrying forward your pension allowance
If you haven’t used all your annual allowance in a given year, you can carry it forward for 3 tax years in certain circumstances. This is handy if you’re self-employed, your income fluctuates year to year and you want to save for a big contribution.
Make use of your tax benefit
You can easily make extra pension contributions with the Husky for Everyone (H4E) app, a great way to make use of your tax relief before the end of the tax year.
If your employer is with Husky, you can download the Husky for Everyone app for Android or IOS to view how much annual allowance you have used and to contribute more into your pension. Please e-mail us to receive the code to link your workplace pension.
If your employer is not with Husky yet, you can refer your employer to Husky to take advantage of all the benefits. Contact us to know more.
Are you a director-only company?
For most sole directors, contributing from the Limited Company it’s also a great way to save for retirement. With your contributions coming from the limited company, you can class the contributions as business expenses which will reduce the amount of corporation tax you have to pay.
Do you need help setting up a scheme and making regular or one-off contributions? Have a look at our director-only offering.