By Steve Shovlin

3rd August 2022

Has Contributing to a Pension become even more important?

The COVID pandemic has seen unprecedented support for many people and businesses in the UK over the last 2 and a half years. Enforced lockdowns around the world has led to supply chain issues with many goods being delayed for months. The global economy initially saw a sharp downturn and thankfully has then seen a recovery as we all came out of our houses last year.

However, clearly there have been many consequences to all of this. A key one is the increasing pressure on The Treasury to raise revenue due to the unprecedented levels of debt the UK has accumulated because of the global pandemic. Another is we are now seeing a sharp rise in inflation as the Consumer Prices Index (CPI) annual inflation figure soared to 8.2% in June as prices are now much higher. It’s not just supply and transport that has contributed to this rise in inflation. Clothing and footwear, food and non alcoholic drinks and furniture and household goods have all seen larger recent price rises than they have for the previous three years.

In March 2021, in the Budget, announced that the lifetime allowance (LTA), which governs how much can be saved in a pension before tax charges apply, would remain at its current level of £1.073m until 2025/26. This is a reversal of policy introduced 3 years ago where the LTA was due to increase in line with inflation.

Then it was announced in September increases to National Insurance Contributions (NICs). In April 2022, NIC rates rose by 1.25% for employer and employee. This means an employed basic rate taxpayer earning the median basic rate taxpayer’s income of £24,100/year in 2022/23 would contribute an extra £180/year, while a higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100/year in 2022/23 would pay an additional £715/year. The changes could have major impacts on your financial planning, particularly if you run your own business.

So how can you counteract this?

The first thing you can look at is making pension contributions. So why would you want to do this?

By making a pension contribution you can reduce the level of tax you pay through tax relief. Tax relief is based on your pension contributions at the highest rate of income tax that you pay, which means that the amount of relief you actually get is based on the tax band you are in. It’s a bit like being rewarded for paying into your pension, where the government effectively tops up your pension payments by the amount of tax you would have paid on the income.

Another way to mitigate the NI increase for employers and employees is through making pension contributions, for those who are employed, through salary sacrifice as you can reduce your income tax & NI bills. However, you do need to be aware though as salary sacrifice isn’t suitable for everyone. It can also affect other areas of your financial affairs, so you should explore this carefully.

Also, you can use Carry Forward. This allows you to make use of any pension annual allowances that you might not have used during the three previous tax years, provided that you were a member of a registered pension scheme during the relevant time period. Check if you have any unused pension annual allowance from 2018/19, when the maximum annual allowance (before tapering) was £40,000. You have until the end of the current tax year to mop up this past allowance or you then lose it.  Remember, you must use up this year’s allowance first and then use any unused annual allowance from the earliest year first and can only use it once. This maybe a key area, for those who can afford to do so, to explore.

In addition, continued higher rate tax relief, for those higher earners, is seen by many people to be an area that the Chancellor could target in the future. A flat rate of tax relief for all pension contributions has long been argued over which, if adopted, would affect those in the higher tax band and above. Now may therefore be a good time to review and make use of any unused allowances.

Finally, new research confirms many people are experiencing the growing gap between what the State pension provides and a comfortable retirement. The full uprated new state pension from April 2022 will be equivalent to £9,628 a year. The Retirement Living Standards research calculated the cost of three different baskets of goods and services that equated to three retirement living standards – Minimum, Moderate & Comfortable. For a single person these are as follows:

• Minimum retirement income is £12,800
• Moderate retirement income is £23,600
• Comfortable retirement income is £37,300

This is why making pension contributions could help you in a number of ways to mitigate tax increases and help plug the gap in retirement.

So, how well are you preparing to plug the gap in addition to the other benefits already referenced in this article?

As Chartered Financial Planners, Armstrong Watson Financial Planning & Wealth Management, work with you to build your retirement plans and regularly review these so you know if you will remain on track to achieve them. To support this we can use calculators and cashflow forecasting to allow you to understand your plan more easily to help you make informed decisions.