At a glance
There are still restrictions to be aware of, however. The tapered annual allowance will impact those earning more than £200,000. Plus, you may be liable for Capital Gains Tax on earnings from benefits such as shares. An adviser can help you navigate these complex rules.
As a high-earning executive, it’s important to know your money is working as hard as possible when it comes to retirement planning. You’ll likely want to maximise pension contributions, which can bring considerable tax relief if you’re a top-rate taxpayer. But as you accrue a sizeable pension pot, it’s important to think about how to make the most of the various reliefs and allowances available to you.
The removal of several pension restrictions in the 2023 Spring Budget will, in general, have increased your options. Because of this, seeking expert financial advice to help you make the best decisions for your circumstances is more important than ever.
The abolition of the pension lifetime allowance (LTA) charge, announced in the Spring Budget 2023, means that there are no longer penal tax charges. The Lifetime Allowance will cease to exist in April 2024, but some restrictions still apply, such as the maximum tax-free lump sum available from a pension. This can vary, but for most it will be limited to £268,275, regardless of how large your pension pot becomes. Anything drawn from the pot over the tax-free amount will be subject to Income Tax, so you could pay as much as 45% on the income drawn, especially if you have other income.
The first thing you should consider in light of this change is whether to start making contributions to your pension again if you’d previously stopped because you’d funded it to the maximum of the LTA.
The taxation of pensions means that it’s important to make use of other options such as ISAs (see below) to fund retirement, too.
Many high earners won't benefit at all – or only partially benefit – from the increase in the pensions annual allowance from £40,000 to £60,000 in 2023, as those earning more than £200,000 a year may be impacted by the tapered annual allowance.
This means that if you have a ‘threshold income’ of more than £200,000 and an ‘adjusted income’ of more than £260,000, the tapering will kick in. Working out the numbers can be complex – so always seek professional advice – but in a nutshell, the annual allowance of £60,000 is reduced by £1 for every £2 of adjusted income above £260,000.
The tapering then stops at £360,000 of adjusted income, meaning that no matter how much you earn, you can still retain an allowance of £10,000 per year – whereas the previous minimum stood at £4,000.
This may not seem like a huge amount to a high earner. But it’s still worth making the contributions to take advantage of the tax relief.
Also, if you have a large pension fund but are on a salary below £200,000 – for example, if you’ve downshifted in later life but are still doing some work – then you may have the option to fully use your annual allowance. Although the annual allowance is £60,000, you can only personally get tax relief on 100% of your earnings, or £3,600 (whichever is higher).
If you’re likely to be paid a bonus, it’s worth thinking about what form that takes if you have the option – for example, as cash or shares. If it’s in cash, you may be able to pay it directly into your pension and benefit from Income Tax relief at 45% if you’re an additional-rate taxpayer, on the basis that tax relief above the basic rate is reclaimed via your tax return. In some cases, you can pay it into a pension before you’re taxed, not only making it easier but also saving yourself some national insurance.
If you receive a bonus in shares, generally you must hold them for a period of three years. After this time, you’ll have rights to them and can sell or move them into an appropriate tax wrapper. The bonus only becomes taxable when they become yours, and your employer will generally give you options with regards to how you pay the tax and national insurance due at this time. Once they’re yours, you’ll be subject to the usual rules and any gains after this point will be subject to Capital Gains Tax (CGT) on the sale. However, even during the three-year holding period, you should be eligible for dividends on these shares. These will be subject to tax at the dividend rate if over the dividend allowance – which is £500 for the 2024/25 tax year.
However, if you have acquired shares in your company through a Sharesave or SAYE scheme, you will have purchased the shares using income that has already been taxed. Provided you have available ISA allowance, you’ll be able to move them into an ISA free of CGT, then any dividends paid will be tax free too. Alternatively, you can keep the shares and pay CGT when you decide to sell them. Dividends will be paid directly to you and will then also be subject to tax at the dividend rate, which would be 39.35% if you’re an additional-rate taxpayer and have already used your dividend allowance.
The best advice is to make sure that you’re maximising the use of all allowances, which can often mean moving between tax wrappers at the appropriate points. Getting holistic advice on your assets is the best way to do this.
Although the annual ISA limit remains at £20,000 per tax year, which may be only a small fraction of the amount you want to invest, it’s still worth taking advantage of it.
The big advantage of ISAs is that there are no restrictions on when you can withdraw funds or how much you can take. So if, for example, you want to make a large purchase before you reach the age at which you can access your pension pot (currently 55 but rising to age 57 in 2028), you won’t have to worry about paying tax on what you withdraw.
Using ISA savings alongside pensions in your retirement can give you more flexibility – for example, if you need an additional lump sum but don't want to cause a tax charge.
When it comes to accessing your funds in later life, it’s important to make sure you’re using all the appropriate tax allowances – which we call an ‘all-assets approach’ to retirement.
That means thinking carefully about which wrappers to draw from at which time. For example, withdrawing from an ISA, which is tax free at the time of withdrawal, alongside some tax-free cash and taxable income from a pension would mean more in your pocket because you’d be paying less tax and possibly avoiding a higher tax bracket.
To do this, you’ll need to ensure you already have your funds spread across various tax wrappers in the first place. You need to get everything in place early enough, so you can utilise this approach when you get to retirement.
Too many people don’t think about this until it’s too late – everything could be in the wrong tax wrapper, and there’s nothing you can do at that point to move things around tax-efficiently. That’s why good advice all the way through is so important, so get in touch.
The value of an Investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.
Financial Adviser, Wiltshire Wealth Management, Partner Practice of St. James's Place
SJP Approved 03/04/2024