As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. A private pension may not be right for everyone. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a pension is right for you, please seek financial advice.
Whilst a lot of focus on tax year end is given to ISAs, it’s also important to remember that the tax year end is very relevant for your pension as well. Below we have outlined some key considerations and rules to think about when it comes to your pension allowance.
How does the pension allowance work?
Annual allowance:
The annual allowance is the maximum amount of money that can be contributed to your pension schemes each year without incurring tax charges. This has recently been increased to be up to £60,000. The rule is that you need to have earned that amount in the tax year in order to contribute that much, otherwise your contribution is capped at the amount you have earned that year.
For example, if you will earn £100,000 from employment in this tax year, you can contribute £60,000 to your pension (for this year’s allowance – you may be able to carry forward some previous allowance, but we will touch on that later). However if you will earn £30,000 from employment in this tax year, then the maximum you can contribute to your pension will be £30,000.
For individuals with income (including pension contributions) over £200,000, the annual allowance may be reduced on a tapered basis, potentially down to £10,000 for those with income over £260,000.
Employer contributions
If you are self-employed, either with your own Ltd company or as a sole trader – it is vital that you remember to continue to fund a pension to support your future. This can also have tax benefits for your company, as this can be offset as a cost against any profits that you are making, perhaps reducing your corporate tax bill (if you have a limited company set up).
At Moneyfarm, we support employer contributions into our pensions. You simply need to fill out a form and send it back to us and we will set up a link to your company so that you can fund from there. If you are a sole trader, then you don’t need to do this, you can simply fund from your bank account and your tax relief (personal) will be added as with other personal pension contributions.
What are carried forward pension contributions?
Carry forward allows individuals to make use of any unused pension allowance from the previous three tax years. This means that if you haven’t used your full pension allowance in previous years, you can carry forward that unused amount and add it to your current year’s allowance, potentially enabling you to contribute more than the standard annual allowance without facing tax penalties.
That means you’re able to make a pension contribution of up to £180,000, including tax relief, in 2023/24. However the rules on the allowance are consistent with the points in the first section. Including that you cannot contribute more than the amount that you have earned in this tax year. So, if you had £180,000 available to contribute from an amalgamation of previous allowances, but you will earn £100,000 this tax year, then £100,000 is still the limit.
Carry forward is complex by nature, and there are a few more considerations to this, so to ensure you qualify and are taking the right course of action then please get in touch with one of our qualified consultants.
How do I claim tax relief on personal contributions?
Because the pension is traditionally a vehicle that is funded before your income tax is deducted (i.e. with your workplace pension), any contributions that are made from a personal account are eligible to have money added back. This compensates for the income tax that has been charged. For all contributions (unless instructed otherwise or for employer contributions) we add the basic rate of income tax back onto all contributions automatically.
So for a contribution of £10,000 coming from someone’s bank account, we would add £2,500 on top (more accurately the government does via us), so the amount that is invested is £12,500.
If you are a basic rate taxpayer, there is nothing else that you need to do.
If you are a higher or additional rate taxpayer, after the end of the tax year you will have to fill out a self assessment. Here you can specify the private pension contributions that you have made and then HMRC will reimburse you – either through direct cash rebate or by future reductions of income tax.
What are the deadlines for pension contributions?
For Moneyfarm Pension holders, the deadlines for the 2023/24 tax year are:
Direct Debit (both for one-off and monthly):
- First payment into the pension – Friday 15 March
- Recurring Direct Debit and single payments with an existing mandate – Friday 22 March
Please reach out to us if you are after this deadline as we can then orchestrate an alternative, up until closer to the end of the tax year-end.
If you are setting up a new employer contribution into the pension we will need to also have all documentation signed off, along with any payment, before the end of the tax year. You can find the employer contribution form here and can find your Moneyfarm pension ID through any pension documentation in the ‘Documents’ section of your Moneyfarm account. Please return this form to employer form to pensionpayments@moneyfarm.com so that we can generate the relevant documentation.
Any payments received after the dates listed cannot be guaranteed to be attributed to the 2023/24 tax year.
If you would like to discuss your individual situation to get a better understanding of the rules, please don’t hesitate to reach out to us. You can book an appointment, simply give us a call or email us on support@moneyfarm.com and we will be happy to help.
Chris Rudden, CFA, Head of UK Investment Consultants: Chris is passionate about blending technology and human expertise to help people make better investment decisions to secure their financial future. With a keen interest in the impact macro economics has on investments, Chris has been at Moneyfarm for over 7 years now and is a chartered financial analyst with the CFA society.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
