Time for partners to focus on personal finances
The current climate has led many legal partners to rethink their plans for saving for the future. Now more than ever, with the Christmas break right around the corner and tax returns due in January, many partners will be reflecting on their personal financial plans and approaches to any further investment.
Pension contributions and tax relief is an area to pay particular attention to over the next few months. The coalition government has announced exciting proposals for the regime of tax relief on pension contributions made on or after 6 April 2011. More of that in a minute.
Until April next year, we’re stuck with the previous government’s ‘anti-forestalling’ regime, which is in place for those earning above £130,000 and applied to contributions made in the 2010/11 tax year. Broadly, this means that those affected can only obtain higher-rate tax relief on contributions with a gross equivalent of £20,000 to £30,000 (depending on their own circumstances) – unless they had a contract with higher monthly or quarterly contributions in place already on the relevant day in 2009.
Those content with basic-rate tax relief only may wish to extend their 2010/11 contributions to the current annual allowance of £255,000 (gross), as this annual allowance will be reduced to £50,000 on 6 April 2011.
What is exciting about the new annual allowance from 6 April 2011 is that tax relief will be available at a contributor’s highest rate. This differs from Labour’s proposal to end higher-rate relief on pension contributions for high earners entirely, and the coalition’s original plans of restricting the relief to a 40% tax rate.
More surprisingly – and pleasantly so – is the fact that any unused annual allowance will be able to be carried forward for up to three years.
Even more startlingly, the £50,000 annual allowance will be deemed to have existed for the period 2008/09 to 2010/11. This means that those caught by the anti-forestalling regime in 2009/10 and 2010/11 will be able to recover some lost ground by making catch-up payments in 2011/12 with the benefit of 50% tax relief if their earnings are sufficient.
Other tax reliefs can be obtained by contributing to the pension funds of your immediate family members. Non-taxpayers may invest up to £3,600 gross (that is, a net payment of £2,808) in pensions each year. Should you wish, you can thus contribute to modest pension funds for your spouse, children or grandchildren and have the investment benefit from basic-rate tax relief. Not only is this more tax-efficient than simply gifting cash, but it also locks funds away for children and grandchildren throughout their teens and early adult years.
This winter legal partners should determine the 2010/11 pension contributions they will make under the anti-forestalling regime. They should also consider how much of their spare funds they wish to earmark now for contributing to pension funds under the new Annual Allowance regime at a 50% tax deduction rate as soon as it comes into effect on 6 April 2011. After all, one never knows how long the opportunity might remain open.
When it comes to pension contributions and tax relief, 'tis the season for planning ahead.
Louis Baker is head of the professional practices group at Crowe Clark Whitehill
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