Tax Incentives To Invest In Pension Properties – Part 3 – Business & Employer Contributions


Simon Misiewicz

21st July 2014

Posted by Simon Miseiwicz on 21st July 2014

Would you like to invest in property whilst getting a tax rebate?

Would you like to build and control your pension pot?

In this series of articles I am going to demonstrate the tax advantages of investing into a pension fund that still allows you to invest in property. Albeit the properties you will be allowed to invest into will be commercial in nature.

The types of commercial properties that will be allowed are as follows:

  • Serviced apartments
  • Hotels
  • Bed & Breakfasts
  • Holiday Lettings

There are several elements to this series as follows:

Part 1 – Pension Overview & SIPPs
Part 2 – SSAS pensions and loan backs
Part 3 – Business & employer contributions

Part 3 – Business & employer contributions

Did you know that your employer (also your own business) can pay into a pension on your behalf? Not only can you personally pay into a pension and benefit from a tax relief but your company can to. As an additional bonus the pensions contribution that the company makes is also tax allowable. (2)

A new law means that every employer must automatically enrol workers into a workplace pension scheme if they:

  • are aged between 22 and State Pension age
  • earn more than £10,000 a year
  • work in the UK

This is called ‘automatic enrolment’.

Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic, higher or additional rate you get the full relief straightaway.

If  your employer can’t deduct your pension contributions from your pay you can still get tax relief. You’ll need to claim the tax relief you’re due through your tax return, or if you don’t complete a tax return by contacting HM Revenue & Customs (HMRC).

However, some employers use the same method of paying pension contributions that personal pension scheme payers use – read more in the section on ‘Personal pensions’.(6)

Many employers have either a company pension scheme that they’ve set up for their employees or provide access to a group personal scheme. Your employer will also contribute towards your pension.
From October 2012 employers had to start enrolling their employees into a pension scheme and pay contributions for them (7).

How much you can invest into a pension

The amount of your pension savings that benefits from tax relief is limited to an annual allowance, currently £40,000 as long as the below is in place:

  • a registered pension scheme
  • an overseas pension scheme – as long as either you or your employer qualify for UK tax relief on those pension savings

If you save more than this amount you may have to pay a tax charge on the excess.

You can carry forward any unused annual allowance from the last three tax years to the current tax year so you might not have to pay the annual allowance charge. Therefore you can invest £120,000 on the first investment.

If your pension savings are more than the total of the annual allowance and your unused allowance you’ll pay a tax charge on the excess.

You’re responsible for paying the annual allowance charge. In certain circumstances you can ask your scheme administrator to pay the tax out of your pension pot.

Depending on what type of pension scheme you’re in, working out how much annual allowance you’ve used or can carry forward and how much tax you have to pay can be complicated.

The tax rate that’s charged depends on any other taxable income you have. The amount of your pension savings that exceed your annual allowance is added to any other taxable income for that tax year. After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands. (5)

Precautionary measures

How much tax – if any – you will pay on your pension income depends on the overall amount of taxable income you have. Your taxable income may include:

  • State Pension
  • income from a retirement annuity, personal, stakeholder and/or workplace pension
  • any taxable State Benefits you may qualify for
  • savings or investments
  • income from a job if you work after State Pension age

If your taxable income is greater than your tax allowances you’ll pay tax on some or all of your pension income. If your taxable income is equal to or less than your allowances you won’t pay any tax on your pension income .(3)

Certain life events may affect what happens to your pension savings and the amount of your pension pot. These events include:

  • leaving your job
  • transferring your pension pot to another scheme
  • being unable to work because of ill health
  • divorce
  • being made bankrupt

Be sure that you review your pension pots / provisions whenever the above occurs in your life. (7)

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