We have seen relatively higher profits from farming over recent years, although do appreciate that profits are now reducing as a result of commodity prices coming down. Pension contributions have provided a means of reducing income tax liabilities, and will still be relevant when contribution with reliefs such as farmers’ averaging.
Pensions are possibly the most tax-efficient investment currently available. Contributions are paid net of basic rate tax relief, which means you get an immediate 25% uplift on your payments. Pensions are also currently exempt from IHT, which makes them an ideal investment to pass money to your family without paying IHT.
In the current tax year, the maximum contribution to a pension is £60,000 or 100% of net relevant earnings. Net relevant earnings are income from employment or self-employment. Rental income, bank interest and non-trading income is not included as net relevant earnings. Regardless of earnings, anyone under age 75 can contribute £3,600 gross into a pension and receive tax relief.
In addition to basic rate tax relief, if you are a higher or additional rate taxpayer, you are still able to claim additional tax relief through your tax return.
If you have a pension that you have not paid into for a while and have enough net relevant earnings, it is possible to take advantage of the carry forward rules and pay up to £180,000 into a pension in the current year. In order to do this, you must maximise contributions for 2023/24, then you can use unused relief from 2020/21, 2021/22 and 2022/23. If you do not have sufficient earnings to use unused relief in one go, you can spread this over say the next three years. If allowances are not used for the 2020/21 tax year in the current year they will be lost after 5 April 2024.
On death and under current legislation, pensions are paid to dependents free of tax until age 75. After age 75, anything drawn from the pension would be taxed at the beneficiaries’ highest marginal income tax rate. At present, this would be the case regardless of whether the pension has been drawn or not.
For the past couple of years, investment markets have struggled due to rising inflation and interest rates, and the war in Ukraine. This has put people off investing, however, it is possible to invest your pension in other assets, such as a commercial building. If you have commercial buildings that are let for non-agricultural purposes, it is likely that the building will not get any Agricultural or Business Property Relief. Selling that building to your pension fund would remove the uncertainty. There will be tax costs as result of a change of ownership, but once the building is in the pension, future growth would be tax free, rental income is tax free and does not count as a contribution and the pension is not liable to IHT. The other benefit is that you are releasing cash from your pension to use in your business. You do need to have enough in the pension to enable you to buy the property, but a pension can borrow funds to top up if you are a bit short on funds.
Finally, if you have a number of pensions with different providers, do you know how much the provider is charging you and how are you keeping track of how these funds are performing?
A lot of new pensions have a clear charging structure, so you know exactly how much you are paying and have far better fund choices than older plans. In some circumstances, moving to a new provider is the right thing to do to reduce charges, enhance performance and possibly consolidating the existing plans into one.
Consolidating pensions prior to drawing benefits is a lot more efficient as there is only one provider to deal with.
Please contact Ellacotts if you wish to discuss this article or if you have a query. Contact us on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
