US Edition
Write to Pensions Doctor with your pension problem: pensionsdoctor@telegraph.co.uk. Columns are published weekly.
Dear Becky,
I am an IT contractor in my sixties, and have been forced into an umbrella company due to the IR35 tax rules.
The company pays into my pension using employer contributions, and I am aiming to pay in the maximum annual pension contribution of £60,000 to maximise the tax benefits.
My issue is that as a temporary worker, I never know if or when I will be working as my contract extensions normally take place every three months, and often only come through a week before the original end date. Therefore, I risk losing the tax gain if my contract is not extended prior to the end of the tax year.
I have asked if I can vary the contributions, for example pay a maximum possible while working and then drop it if I reach the maximum if I get an extension. Similarly, holiday months are problematic as I am paid on a day rate and don’t have paid holiday leave.
The umbrella company has pointed me to HMRC guidelines, but have failed to produce them and I have failed to find any. Can you help?
Anon.
Dear reader,
If I am interpreting this correctly, if your contract is not extended before the beginning of April, and because of your unpredictable income in general (ie you don’t get paid when you are on holiday), you are worried about not being able to pay as much in to your pension to hit the £60,000 annual allowance in the current tax year (it went up this year from £40,000), and wasting an opportunity to save tax.
It sounds as though your umbrella company may not want to keep varying the contributions throughout the year – possibly just because it could be a headache for the payroll department. Don’t panic, though – I think you may have some options.
The annual allowance is the maximum amount of contributions someone can make in a tax year. You could technically pay in more than this, but would be liable for a tax charge.
Understandably, you would like to reach the allowance limit to get as much tax relief as possible, particularly as you are still working in your sixties and presumably not yet taking an income from your pension (if you were, that annual allowance would drop to £10,000 a year – called the Money Purchase Annual Allowance – and something you should bear in mind).
For someone in similar circumstances to you who’s beyond the Normal Minimum Pension Age and still working, maxing out tax relief on pension contributions as a priority makes financial sense.
When you decide the time is right to stop paying in and start accessing your pension, you can do so straight away, taking 25pc tax-free with the rest taxable, but hopefully at a lower marginal rate of income tax than you are currently paying as a worker.
I’m guessing you are currently either a higher or additional-rate taxpayer. If you end up earning more than £200,000 in a tax year, then be warned: you could be subject to the tapered annual allowance.
Once your adjusted income, which includes investment returns outside of Isas and pensions and the value of employer pension contributions (if these are relevant), exceeds £260,000, your annual allowance decreases by £1 for every £2 over £260,000. This applies up to £360,000, so your minimum annual allowance under the taper would be £10,000.
You are concerned about not filling the annual allowance, but there is also the risk when earnings vary and you are auto-enrolled through an umbrella company that you could accidentally breach it, through working more and automatically paying in more. If you go over the limit, you could have to pay that tax charge.
Something else that could potentially be useful to you is “carry forward”. This allows you to use up unused annual allowance from the previous three tax years, once you have filled up your annual allowance for the current tax year.
So if you did not meet the full annual allowance between 2022/23, 2021/22 or 2020/21, then there may be an opportunity to benefit from tax relief on new contributions for these years, if you find you reach your annual allowance this year.
However, for these years, the annual allowance was £40,000, not £60,000. You must also have been in a pension scheme for these years.
By early next year, you should have a bit more clarity on how much you have earned and managed to pay into your pension for the 2023/24 tax year.
If it ends up being less than the annual allowance – because, for example, a contract is not extended – you could potentially just top up your pension contributions to maximise your annual allowance yourself, by making personal contributions either to your current scheme or another personal pension.
If you choose to do this, you will need to be conscious of the net relevant earnings test, which means you can’t claim tax relief on contributions higher than your actual earnings.
If your current contributions are made on a salary sacrifice basis and you choose to make further personal contributions, you could lose out on the National Insurance saving, but still benefit from tax relief.
Alternatively, you could consider using carry forward at the end of the next tax year (2024/25), from any unused allowance you had left from this year. Doing this would mean having to wait a bit longer for your full entitlement to be added, but better late than never.
As ever, email your questions to pensionsdoctor@telegraph.co.uk
‘How can I maximise pension tax relief when I have an unpredictable income?’
Pensions Doctor: our reader wants to know how to make sure £60,000 is paid into their workplace pension