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Tax Planning: Pension Contributions

The loss of top rate tax relief for pension contributions was not included in the 2012 budget as some people feared. Individuals can continue to make tax free pension contributions into their scheme up to the threshold set for each year. This is an effective form of tax planning particularly for individuals subject to the 50p top rate of income tax.

The pension threshold is £50,000 in 2012/13. Individuals are able to go back 3 years and contribute towards their pension allowance for those years. You must top up the current year first up to the required threshold and can then go back a further 2 years (go back to the furthest year first) and top up to £50,000 for each year. The pension contribution threshold cannot be exceeded in any of those years. A high rate taxpayer is therefore able to make tax free contributions of up to £150,000 in the current tax year.

Higher rate taxpayers would be advised to consider this in the current year whilst the top rate of tax remains at 50%. Pension contributions could effectively be brought forward to the 2012/13 tax year and reduced in subsequent years when the rate falls to 45%.

Each individual has a lifetime allowance of £1.8m, reduced to £1.5m from 2012/13, for which pension contributions are tax free. No tax relief is available once this threshold has been reached.

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