Case Study 1.
Increasing the Pension Fund and reducing the Income Tax Bill.
Mrs H has been a longstanding client of EBS and has always been keen to fund her pension and investment savings, for her retirement. She is married and in her mid fifties, with plans to retire within ten years. Over the last few years she has seen her income increase significantly.
However, legislative changes meant that Mrs H, now a high earner with income in excess of £175,000pa, thought that her ability to make pension contributions was severely restricted. This was due to the ‘tapering’ of her Annual Allowance, given that her ‘Adjusted Income’ was in excess of £150,000. This, she thought, would reduce her ability to make large pension contributions.
She remained keen to plan for her retirement and asked if there were any solutions. Following detailed discussion of her circumstances, and after investigation, we advised that whilst she was restricted as regards her current year Annual Allowance, she still retained the balance of unused Annual Allowances from earlier Tax Years. This meant that those unused allowances could be ‘Carried Forward’.
Mrs H had built up large cash savings due to her excellent recent earnings, along with an inheritance. We suggested that she take advantage of her previous year Annual Allowance balances by ‘carrying forward’ her spare capacity. This enabled her to pay a contribution of £85,000 gross into her pension.
This had additional very positive consequences.
Firstly, she was able to gain 20% Basic Rate tax relief immediately and at source, reducing the cost of her investment to £68,000. As an Additional Rate taxpayer she could also claim Higher/Additional Rate relief, equating to a £18,250 tax rebate.
Secondly, it also meant that her ‘Adjusted Net Income’, for the purpose of claiming her Personal Allowance, was reduced below £100,000 and she was able to benefit from this, which further reduced her tax burden significantly.
Finally, and just as importantly, Mrs H was able to boost her pension funds, helping her to better plan for her retirement.
At the meeting, she initially thought the new Tapered Rules for high earners was going to be a major issue for her. However, with careful planning, we were able to overcome this ‘hurdle’ and she received a handsome tax refund as well.