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TECHNICAL INFORMATION
ABOUT PENSIONS

A series of technical articles that help in decision making about pensions.

  • Tax relief on your pension contributions

    Basic rate tax relief will be claimed on your behalf and added to your pension pot. Higher rate tax relief may also be available.

    One of the key advantages to saving money in a pension can be the tax relief you receive on contributions.

     

    Basic rate tax relief

    The contribution you make to your pension plan is known as the ‘net contribution’ because it is assumed to be money on which you have already paid tax.

    The scheme provider should be able to reclaim basic rate tax (currently 20%) on your behalf from HM Revenue & Customs on the contributions you make to your pension. 

    For example, if you pay a lump sum of £3,000 into your pension, £750 should be reclaimed from HM Revenue & Customs on your behalf, giving you a total contribution of £3,750.  This is known as the ‘gross contribution’, as it is now as if it came from your gross income (i.e. pre-tax).

     

    What if I pay tax above the basic rate band?

    You may be able to claim further tax relief through your Self Assessment Tax Return. This will not be added to your pension pot. If you are a higher rate taxpayer you may be able to have your tax code adjusted rather than reclaim tax through your Self Assessment.

     

    Is there a limit on how much tax relief is available?

    There is a limit on the tax relief you can get on your pension contributions which is dependent on your circumstances. Broadly this is the lower of your relevant UK earnings and your Annual Allowance.

    Find out more about your Annual Allowance

     

    What if I have no earnings?

    If you have no relevant UK earnings in a given tax year the maximum contribution you can receive tax relief on in that tax year is £2,880 net (equivalent to £3,600 gross).

     

    What if I’m over age 75?

    You’re not entitled to tax relief on contributions made on or after your 75th birthday.

     

    Can I get tax relief on pensions I want to transfer?

    Pension transfers do not attract tax relief – contributions will have already had tax relief when made to the original scheme.

  • Your Annual Allowance

    There is an annual limit on the level of contributions that attract tax relief.

    What is the Annual Allowance?

    There is a limit on the tax relief you can get on your pension contributions which is dependent on your circumstances. Broadly this is the lower of your relevant UK earnings and your Annual Allowance. The standard Annual Allowance is currently £40,000.

    So, if your annual relevant UK earnings were £20,000 the maximum contribution on which you could get tax relief would also be £20,000. If your annual relevant UK earnings were £60,000 then the maximum contribution on which you could receive tax relief would be £40,000.

     

    What if I have no earnings?

    If you have no relevant UK earnings in a given tax year the maximum contribution you can receive tax relief on in that tax year is £3,600.

     

    Does the Annual Allowance include tax relief?

    The Annual Allowance includes basic rate tax relief, and so it’s not the same as the amount you pay in before tax relief is applied. The Annual Allowance of £40,000 would be the same as you paying in £32,000, as an additional £8,000 tax relief would be added to your contribution.

    If you earned £20,000 a year then the most you could pay into a pension before tax relief is applied would be £16,000, on which you’d receive £4,000 tax relief.

    If you have relevant UK earnings below the ‘basic amount’ (currently £3,600) or  no relevant UK earnings at all, then the most you could pay into a pension before tax relief is applied would be £2,880, on which you would get tax relief of £720.

     

    What are relevant UK earnings?

    What counts as ‘relevant UK earnings’ is defined by tax law. It includes things like:

    • your salary
    • profits you make from your trade
    • any bonuses you receive
    • sick pay
    • maternity pay
    • benefits in kind that attract income tax.

    It does not include income from share dividends, interest on cash balances or money from buying or selling assets such as property or securities.

     

    What if I’m a member of a defined benefit scheme?

    Any benefits you build up in a defined benefit scheme are counted against your Annual Allowance, in addition to contributions you make to any defined contribution schemes, including a Coutts Invest Pension. These can add up quickly, so it’s a good idea to make sure you’re aware of how close you are to your Annual Allowance before contributing to a pension plan like Coutts Invest Pension.

    If you are an active member of a defined benefit pension scheme you should contact the scheme’s administrator and ask for your ‘pension input amount’ for the tax year to help you understand how close you may be to the Annual Allowance.

     

    What happens if I make pension contributions in excess of the Annual Allowance?

    If you exceed the Annual Allowance you may be liable to an Annual Allowance Charge.

    Find out more about the Annual Allowance Charge.

     

    Is there a limit to how much I can hold within my pension?

    You may also have to pay a Lifetime Allowance charge if your accumulated pension benefits exceed the Lifetime Allowance. For the 2021/22 tax year this Allowance is £1,073,100.

    Find out more about the Lifetime Allowance

     

    Other things that might affect how much you can pay into a pension

     

     

  • 'Carry Forward' of unused Annual Allowance

    If you want to contribute more than the Annual Allowance into all of your pension plans in a tax year, you may be able to 'carry forward' unused allowance from previous tax years.

    This rule allows some people to use any unused Annual Allowance from the previous three tax years in the current tax year. You must have used the current year’s full Annual Allowance before making use of unused allowance from previous years.

     

    You can do this if:

    • you have relevant UK earnings of at least the gross amount you wish to pay into a pension in total in the current tax year.  For example, if you wanted to use ‘carry forward’ to make a payment of £48,000 you would need to have relevant UK earnings of at least £60,000 in the current tax year, equal to the net £48,000 contribution plus £12,000 in basic rate tax relief

    AND

    • you were a member of a UK-registered pension scheme in each of the tax years from which you wish to ‘carry forward’, although you don’t need to have made any contributions in those years

     

    You can carry forward the full amount of any unused Annual Allowance from each of the last three tax years.

    You should make sure you keep a copy of all of your calculations and any other information you get from your pension plans to support your calculations.

    The example below shows how a taxpayer with unused Annual Allowance in the last three tax years would calculate their ‘Carry Forward’ allowance.

     

    Carry forward example*

    Tax Year Three years before e.g. 2018/19 Two years before e.g. 2019/20 one year before e.g. 2020/21 current year's annual allowance e.g. 2021/22 Overall Total
    Annual Allowance £40,000 £40,000 £40,000 £40,000  
    Total pension contributions made £20,000 £30,000 £20,000 £0  
    Amount of unused annual allowance £20,000 £10,000 £20,000 £40,000 £90,000
    Total Possible Contribution in Current Year e.g. 2021/22 £90,000

    In this example you could get tax relief on gross contributions of £90,000 in the current tax year – your £40,000 Annual Allowance from this year, plus the £50,000 unused allocation from the three previous years. Remember, you would also need to have relevant UK earnings for the current tax year of at least this amount.

    *Neither the Tapered Annual Allowance nor Money Purchase Annual Allowance applies to this example, but they might affect the total allowance that you have.

    Find out more about the Annual Allowance

  • Annual Allowance Charge

    If you pay contributions in excess of the Annual Allowance you may be liable to the Annual Allowance tax charge.

    If the 'total gross contributions' to all of your pension pots after taking into account your basic tax relief at source for a given tax year exceed your annual allowance you may be liable to the Annual Allowance Charge. This has the effect of cancelling out the tax relief on your contributions in excess of your Annual Allowance.

    Your contributions will still however be added to your pension pot and can be used in the same way as the rest of your fund when you take your pension benefits.                                                                                 

    If your Annual Allowance Charge is over £2,000 and certain conditions are met, it may be possible to have it deducted from your pension pot rather than added to your tax bill.

    If you think you are getting close to your Annual Allowance you may want to speak to a professional adviser to help you understand how much you can still contribute and the tax implications.

    Find out more about the Annual Allowance

     

    There is an overall limit (known as the Lifetime Allowance) of how much you can accumulate in all of your pension plans without incurring a Lifetime Allowance Charge.

    Find out more about the Lifetime Allowance

  • Tapered Annual Allowance

    For higher earners (typically those earning over £240,000 per annum), the Annual Allowance may be reduced to as little as £4,000.

    The Annual Allowance is reduced for people with high incomes for any tax year from 6 April 2016.

    Broadly speaking, if your annual taxable income plus extra pension contributions (such as employer contributions or salary sacrifice contributions, but excluding your personal pension contributions) is more than £240,000 your Annual Allowance may be reduced.

     

    Working out if you are affected

    You’ll be liable for a Tapered Annual Allowance if you exceed two income limits

    1. Threshold Income and
    2. Adjusted Income.

     

    Step 1: Calculate Threshold income

    • Taxable income + salary-sacrifice pension contributions – personal pension contributions

    This is broadly your total taxable income from all sources plus any salary and bonus you give up from your pay in order to receive pension contributions, minus any personal pension contributions you have made.

    If your threshold income is £200,000 or less your Annual Allowance will not be reduced this tax year.

    If your threshold income is more than £200,000 your Annual Allowance may be reduced if your adjusted income is over £240,000.

     

    Step 2: Calculate Adjusted Income

    • Taxable income + any pension contributions from employer or others + salary-sacrifice pension contributions – personal pension contributions

    This is broadly your total taxable income (after the deduction of certain reliefs) plus all pension contributions made by your employer or others on your behalf, including any deductions under net pay arrangements, minus any personal contributions you have made.

    If your adjusted income is more than £240,000 and your threshold income is more than £200,000 then your annual allowance will be tapered.

     

    Example of how the threshold and adjusted incomes are calculated

    Steve has a salary of £125,000 and investment income of £15,000 in the current tax year.  His employer makes a £20,000 pension contribution and he makes a personal pension contribution of £10,000.

    His threshold income is £230,000 chargeable to income tax less a £10,000 personal pension contribution = £220,000.

    His adjusted income is the £230,000 chargeable to income tax plus £30,000 total pension input, minus £10,000 personal pension contribution = £250,000

    Therefore, he is above the threshold income level do the tapered annual allowance could apply and his adjusted income is above £240,000 so it does apply and a reduction in the annual allowance is required.

     

    Step 3: Calculating the Tapered Annual Allowance

    Where tapering applies, for every £2 of adjusted income over £150,000, your Annual Allowance in the tax year will be reduced by £1, although tapering can only take the Annual Allowance to a lower limit of £4,000

    • For example, if your adjusted income is £250,000 and your threshold income exceeds £110,000, your Annual Allowance will be reduced from £40,000 to £35,000.
    • If your adjusted income is £280,000 and your threshold income exceeds £110,000, your Annual Allowance will be reduced from £40,000 to £20,000.
    • If your adjusted income is £3120,000 or more your Annual Allowance will be reduced from £40,000 to £4,000.

    This is not a comprehensive guide to the Tapered Annual Allowance. There are a few more complexities around if you’re affected and calculating the precise amount by which your Annual Allowance is reduced is beyond the detail we have been able to include here.

    We’ve included these guidelines to help you understand how the system works, but if you think you might be affected by the Tapered Annual Allowance then you should talk to your accountant or tax specialist to work out the precise effect on your Annual Allowance.

  • Money purchase annual allowance

    A reduced Annual Allowance of £4,000 may apply to you if you have taken benefits from any of your existing pensions.

    The Money Purchase Annual Allowance is a reduced annual allowance of £4,000. It could apply to you if you take flexible benefits from any of your pension plans, for example through an income drawdown product. Although there are exceptions for serious ill health for instance.

    If you exceed the Money Purchase Annual Allowance, your excess contributions will become taxable, which will effectively cancel out the tax relief on those contributions. There is no ability to carry forward any unutilised Money Purchase Annual Allowance to a future tax year.

    If you’ve never taken any benefits from a pension plan it should not apply to you.

    It also should not apply if you only:

    • take your tax-free pension commencement lump sum of 25% of your pension pot
    • purchase a lifetime annuity with some or all of your pot
    • take a combination of a tax free cash sum and a lifetime annuity
    • take all your pot under the small pension pot rules
    • continue taking ‘Capped Income Drawdown’ within existing prescribed limits.

     

    If you do take benefits from one of your pension plans, then your pension provider should let you know if you’ll be affected by the Money Purchase Annual Allowance.

    If you’re not certain whether the Money Purchase Annual Allowance applies to you then you should consult a financial adviser.

    Find out more about your Annual Allowance

  • Lifetime Allowance

    There is an overall limit of how much you can accumulate in all of your pension plans without incurring a lifetime allowance charge.

    WHAT IS THE LIFETIME ALLOWANCE?

    The Lifetime Allowance is the maximum amount you can accrue in pension benefits from your pension plans before being subject to an additional tax charge.

    The standard lifetime allowance for the tax year 2021/22 is £1,073,100. The allowance is expected to be frozen until April 2026.

     

    HOW IS THE LIFETIME ALLOWANCE CALCULATED?

    The value of your pension benefits is usually measured at the point you take your benefits from your pension plans. It can also be measured for instance when you turn 75 or on your death. For defined contribution schemes (such as the Coutts Invest Pension) it is equal to the value of your pension pot. For defined benefit schemes it is equal to the annual income provided by the pension times 20.

    If the value of your pension plans is more than this limit when you take benefits from your pensions, you will have to pay an additional tax charge. The charge is currently 25% on the excess amount if it is drawn as an income (in addition to tax at your marginal rate) or 55% if it is drawn as a cash lump sum.

     

    Lifetime allowance protection

    If you have applied for ‘Lifetime Allowance Protection’ your Lifetime Allowance may be more than the standard limit. However, if you have applied for and registered any form of lifetime allowance protection then you can’t contribute to the Coutts Invest Pension at this time and you should seek guidance from a financial adviser.

    The situations in which Lifetime Allowance Protection can be applied for are now very limited. You can find more information on the Lifetime Allowance Protection section of the HMRC website. 

    If you think you are entitled to Lifetime Allowance Protection please call Coutts 24 for further guidance.

     

    Should I review how much I'm investing in my pension plans?

    As pensions are normally a long-term commitment, what might appear to be a modest amount today could exceed the Lifetime Allowance by the time you want to take your benefits. It is therefore important that you regularly review the value of your pension plans.

    If you think you may be near, or have exceeded, the Lifetime Allowance then you should consult a financial adviser who can help you understand your options.

  • How you can take your benefits

    You can take your pension pot as cash, use it to provide an income or a combination of both.

    There are a wide range of options for taking your pension benefits which may include:

    • take it as cash – you can take up to 25% of your pension pot tax-free and pay tax at your marginal rate on any cash you take above this amount
    • use some or all of your pot to buy a guaranteed income through an annuity
    • use some or all of your pot to draw benefits while remaining invested in the pension plan (known as flexi-access drawdown)

    You can choose some or all of the above options, whatever suits you.

     

    Coutts Invest doesn’t currently offer any of these options – we’re totally focused on growing your pension pot. This means that when you want to take your pension benefits you’ll need to transfer your Coutts Invest Pension pot to a scheme that provides these products. This process is usually quick and easy and Coutts won’t charge you for these transfers.

     

    As we do not provide tax advice, you should seek independent tax advice as required.  The comments provided above are based on our understanding of current tax law which applies to UK resident and domiciled individuals not subject to tax elsewhere.  Tax law is subject to change, including with possible retrospective effect.  The availability and value of any tax reliefs will depend on your personal circumstances. 

  • Defined Benefit Scheme

    A type of workplace scheme where the level of pension is based on your earnings and length of service with the employer.

    Also known as a ‘final salary scheme’.

    This is a type of pension scheme provided by some employers where the pension benefits are defined in the pension scheme rules rather than being based on contributions and investment returns.

    Benefit levels are typically based on the number of years of membership, usually as an employee of the company offering the pension.

    For example, your pension could be defined under such a scheme as 1/60th of your final salary for each complete year of membership. If you complete 20 years of service and your final salary with the employer is £30,000 then in this example your pension may be calculated as 20/60 x £30,000 = £10,000 per annum depending upon how your “final salary” is defined.

    The Coutts Invest Pension can’t accept transfers from Defined Benefit Schemes.

  • Defined Contribution Pension Scheme

    A type of scheme where you build up a pension pot from contributions paid in which dictates the level of benefits you get at the end. It could be through an employer or a private pension.

    Also known as a ‘Money Purchase Pension Scheme’.

    With this type of pension plan you build up a pension pot from contributions paid in. The value of the pot will rise and fall based on the performance of the investments and other assets held within the pot.

    Benefits are based on the size of your pension pot. Typically you can take a tax-free cash sum from your pot and use the rest to fund an income at retirement. 

    Find out more about taking your pension benefits

    Coutts Invest Pension is a Defined Contribution Pension Scheme.

    If you already have Defined Contribution Pension Scheme pots with other providers you can transfer these to the Coutts Invest Pension

     

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