TAX AND YOUR INVESTMENTS
Setting aside income in the form of savings is important for us all, to provide for the unexpected or to build up a nest egg that we can enjoy
When an allocation of funds into a flexi-access account is made the member typically will take the opportunity of taking a tax free lump sum from the fund. The person will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt. Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking an uncrystallised funds pension lump sum. The tax effect will be: • 25% is tax free • the remainder is taxable as income. Getting the right advice at the point of retirement is therefore important. Money Purchase Annual Allowance (MPAA) The government is alive to the possibility of people taking advantage of the flexibilities by 'recycling' their earned income into pensions and then immediately taking out amounts from their pension funds. The MPAA sets the maximum amount of tax-efficient contributions an individual can make at £4,000 per annum in certain scenarios.
There are controls which serve to limit the availability of tax relief on high levels of contribution. These are complex but, put simply, they may give rise to a tax charge if annual contributions exceed £40,000 or if the value of the fund when benefits are taken is greater than a lifetime allowance which, for 2021/22, is £1,073,100. Generally where a taxpayer has adjusted income in excess of £240,000 the annual contribution possible will be restricted from £40,000 by £1 for every £2 for the excess income. The minimum annual allowance available after this restriction is £4,000. Pensions freedom Taxpayers have choice and flexibility when it comes to accessing their personal pension fund. Options include taking a tax free lump sum of 25% of fund value and purchasing an annuity with the remaining fund or opting for a more flexible drawdown. The flexible drawdown rules allow for total freedom to access a pension fund from the age of 55. Access to the fund may be achieved in one of two ways: • allocation of a pension fund (or part of a pension fund) into a 'flexi-access drawdown account' from which any amount can be taken over whatever period the person decides • taking a single or series of lump sums from a pension fund (known as an 'uncrystallised funds pension lump sum').
in retirement. Pensions
Pensions are one of the most tax efficient forms of saving. Most higher rate taxpayers can contribute £100 to a registered pension fund at a cost of only £60 and investment income and capital gains will accrue within the scheme largely tax free. Contributions are paid net of basic rate tax and the pension provider will then recover that basic rate tax from HMRC. Higher and additional rate relief, if appropriate, can be claimed from HMRC. An individual is entitled to tax relief on personal contributions in any given tax year up to the higher of 100% of earned income or £3,600 (gross). For employees, if the contributions are deducted from salary payments, tax relief is given in the same way as for an individual paying personal pension contributions. In some cases, the pension contribution is paid gross to the pension provider and the contribution is deducted from salary before an employee’s tax is calculated. Tax relief is therefore given automatically. An employer may make contributions to a scheme and a deduction from profits may be available to the employer.
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Tax and Your Investments
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