2020/21 Tax Planning Opportunities: Pension Contributions

Paying contributions into your pension pot can be an excellent way of mitigating your tax liabilities. You can contribute £40,000 per year, which will benefit from tax relief.

Suitable if you:

• Are unhappy about your corporation tax bill
• Are unhappy about your income tax liability
• Earn over £100,000 per year
• Have little/no pension provision
• Are a higher rate taxpayer with a Capital Gains Tax (CGT) liability
• Have a high income child benefit tax charge

For business owners

If you pay corporation tax, pension contributions are an allowable business expense and can reduce the company tax bill (by up to £30,400).

For higher rate taxpayers earning between £100-£125,000

If you're earning £100-£125,000, you'll pay income tax at 60% on these earnings due to the tapering of their personal allowance. Pension contributions can reduce adjusted net income and restore the personal allowance, meaning a 60% tax saving.

For those with Capital Gains Tax (CGT) liabilities

CGT rates are linked to an individual's tax band. So, a basic rate taxpayer pays 10% (or 18% on a residential property), while higher and additional rate taxpayers pay 20% (28% on residential property). If you are a higher/additional rate taxpayer with a capital gain this tax year, reducing your income into the basic rate band by making a pension contribution can reduce the rate at which capital gains tax is payable.

For those with a High Income Child Benefit Tax Charge

If you receive child benefit hit by the High Income Child Benefit Tax Charge due to earnings over £50,000, you could make use of pension contributions to reduce your adjusted net income and remove the tax charge.

As always, please speak to a professional adviser regarding your specific circumstances prior to implementing any of the above advice.