Archive for the ‘Tax’ Category
Pensions–Tax opportunites and traps
The new pension freedom reforms are being accompanied by a flurry of tax changes in April.
Savers could be able to pass on what’s left of their pension pots to loved ones tax-free after death, after the Chancellor announced the scrapping of the 55 per cent tax rate currently applied to funds left to children.
Instead, beneficiaries will either pay tax at their own income tax level – with the money they receive added to their earnings to calculate this – or if the person who dies is under 75 there will be no tax to pay.
The Chancellor also announced in his Autumn 2014 Statement that husbands and wives whose partners die before reaching 75 will get annuity income from their spouse’s pension tax-free. Beneficiaries of ‘joint life’ annuities, or other types that come with death benefits, currently pay income tax on what they receive.
However, over-55s looking to take advantage of new pension freedoms to withdraw big sums from retirement savings need to be wary of landing themselves with big tax bills. Although people will suddenly get unfettered access to their whole pension pot, only 25 per cent of retirement savings will be tax-free while the rest will be taxed as income.
Workers used to usually paying the basic rate of tax through employers might not realise that dipping too freely into their pension pot at retirement could put them into the higher rate tax bracket. If they get it wrong, because they hadn’t checked it or worked it out, they could find themselves suddenly paying out a large amount of tax when cashing in their pension.
People tempted to use their retirement savings to acquire a buy-to-let property are also advised to weigh the tax implications carefully because money shelled out upfront to HMRC could prove a significant drag on returns.
It might also be sensible not to rush into things and to avoid drastic decisions before the May election, which could bring in a new Government that immediately starts tinkering with the pension reforms and tax system.
Although many observers feel that any incoming Government will not want to upset older savers, early in their term, the opportunities for change will still be rife in the coming months.
40% of Nothing
Believe it or not there are a large number of higher rate taxpayers are losing money by not claiming back their additional tax relief.
Prudential has recently published a survey highlighting this issue. The survey found that:
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26% of employees paying higher rate tax do not claim the extra tax relief on their pension contributions.
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It’s estimated 185,000 people are losing, on average, £1,255 per annum.
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A further 15% (over 100,000) are not sure if they are reclaiming the extra relief they are due.
As bad as these findings are there are also likely to be some of those 185,000 who have unnecessarily lost their Child Benefit due to the fact that their earnings haven’t been adjusted to reflect the extra tax relief. Add this potential on and it’s clear that some higher rate tax payers out there are losing a large amount of money.
All is not lost
If you haven’t claimed any relief it’s not too late. You can make a claim for up to four years. So any overpaid tax from 2009/10 can be reclaimed up to 5th April next year.
If you’re not sure whether you have or haven’t we offer a tax relief review service that will analyse your pay slips and tax records to make sure that you are getting what you are entitled to. Just call us on 01163 800 133 to get this underway.
Steve Clark