This year, more than any other in recent memory, advisers will have no shortage of good reasons to meet with clients in the run-up to April 5.
This tax year and next are the last chances for highearners with relevant income of £130,000 and above to get full marginal tax relief on their pension contributions. Those with a history of regular monthly or quarterly contributions above £20,000 a year can continue to pay in what they were paying before the changes were announced. Those with a history of annual and single contributions can pay up to their average contribution over the previous three tax years capped at £30,000. Everyone else can pay in £20,000.
Then there are the income tax changes. From April 6, marginal income above £150,000 will suffer tax at 50 per cent. Taxable income in the £100,000 to £112,950 margin will suffer a 60 per cent effective charge, as the personal allowance is whittled away at a rate of £1 for every £2 income. Keeping income under these thresholds is desirable.
Those with investment income can reduce their income subject to income tax by either sheltering it within a tax wrapper that does not generate income or within a fund that generates gains. Life insurance investment bonds fall within the former category and have the handy facility to withdraw 5 per cent of the original investment each year without any immediate tax liability. Zero dividend preference shares or mutual funds investing in growth stocks are other alternatives.
New salary sacrifices in return for a pension contribution – set up after the Budget or pre-Budget – are not effective in avoiding the new pension tax charges but they retain their usefulness for those who are not caught. For example, someone with £110,000 of taxable income can sacrifice £10,000 and if their employer is prepared to rebate the full National Insurance saved into the employee’s pension, an effective rate of over 65 per cent tax relief can be achieved.
Even for those who cannot enter into a sacrifice arrangement, a pension contribution of £10,000 set against taxable income of £110,000 will generate an effective rate of 60 per cent tax relief.
For those facing 50 per cent tax, the benefit of gain-based investments takes on added attraction, as the disparity between 50 per cent tax on the one hand, and 18 per cent tax on the other (with an annual allowance to boot), is brought into sharp relief. Paying pension contributions up to their £20,000 limit (or more if applicable) for 2009/10 and 2010/11 is also an effective income-tax-mitigating tactic for this group.
With an election due, Budget Day will almost certainly land in March. Don’t discount the chance of a hat-trick of Budget pension tax cuts.
John Lawson is head of pensions policy at Standard Life