The topics of taxes and pensions are never easy to understand at the best of times.
They become even more confusing when the UK Government decides to chop and change things as it does from time to time.
Last year saw Westminster introduce a mini-Budget, which arguably proved fairly damaging to the economy, as well as it happens to the then prime minister, Liz Truss, and her chancellor.
The mini-Budget was swiftly followed by a new PM and chancellor introducing their own fiscal plan, mainly to fix the first one.
Two main policy changes will be of particular interest to high earners or those with large pension pots already.
Firstly, the chancellor announced the annual pension allowance would be increased to from £40,000 to £60,000.
You can carry unused allowances from the three previous tax years.”
Contributions to a pension attract tax relief at the highest marginal rate. For anyone with an inheritance tax issue, it is undoubtedly beneficial to maximise contributions.
It is also important to be aware you can carry unused allowances from the three previous tax years.
So, if you haven’t done so already, it is definitely worth checking right back to 2019-20 if your 2022-23 allowance is fully used up.
Furthermore, tax thresholds have also reduced – which means making pension contributions is the perfect option to reduce your taxable income.
Lower bar for high earners
The highest rate of income tax in Scotland now starts at £125,140 and you lose your personal allowance with earnings of more than £100,000. There is an equivalent tax rate of around 60% at this level.
At this stage, some serious and well-thought-through tax planning can play an important role.
The second major policy change was the removal of the charge for breaching the pension lifetime allowance, which itself is due to be abolished by the 2024-25 tax year.
The reasons behind these changes were widely speculated but whatever the intentions we know it will have an impact for anybody with a large pension pot. Indeed, it brings pensions back into play for many people.
As a consequence of the changes, pension contributions are beneficial once more as they can be made without worrying about a punitive tax charge. It can also be a valuable way to shield funds from inheritance tax.
Don’t be caught out
Taxes and pensions are complicated, and it can be very easy to either fall foul of HM Revenue and Customs or even miss out financially.
It goes without saying that if you do not deal with tax matters on a daily basis and are not a professional in this area, it could well be a wise move to seek advice from someone who is. An independent financial adviser can provide the necessary expertise and guidance to ensure you are meeting your obligations and also making the most of your hard-earned cash.
Russell Anderson, is an independent financial adviser at Aberdeen-based law firm Aberdein Considine.
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