Pension contribution opportunities for partners in professional practices

Personal pension contributions continue to benefit from income tax relief up to your highest marginal rate, the pension fund grows free of corporation tax on income and capital gains, 25% tax-free cash (capped at £268,275 unless protection is in place) is still available, and most pension funds sit outside of the estate for inheritance tax (IHT) purposes. Following the announcement made in the Autumn 2024 Budget, pension funds will be subject to IHT on death from April 2027.

No-one knows how long the current rules on tax-free cash or income tax relief will continue, and so it makes sense to enjoy these opportunities while you can.

What this means for new and on-going pension contributions?

The maximum amount that you can contribute to a pension and receive tax relief on is 100% of your net relevant UK earnings or £3,600pa if more. In addition, tax-efficient funding is capped by the annual allowance (which applies to funding from all sources). For most partners the annual allowance is £60,000 unless the Money Purchase Annual Allowance (MPAA) has been triggered. However, for ‘high earners’ the level of income above which your annual allowance starts to reduce has been increased to £260,000.

If your income is over £260,000, tapering gradually reduces your annual allowance by £1 for every £2 of income, from £60,000 to a minimum of £10,000 (the minimum applies if you have income of £360,000 or more).

What does this mean for Partners making pension contributions?

Partners with Adjusted Income up to £260,000 should consider contributing up to their full annual allowance to take advantage of income tax relief at either 40% or 45%.

Alternatively, if cash flow now permits, and you wish to catch-up on contributions that you may not have been able to make in previous years, you are able to carry forward any unused annual allowance for the three previous tax years, as long as you held a pension plan in those tax years. The current year annual allowance must be fully used first and then carry forward can be used to increase the contribution. Income tax relief will be available, provided there are sufficient taxable profits in the business period to which the contributions relate. The changes to taxation for some sole traders / partners may have an impact and accountancy guidance is recommended.

Those partners with adjusted income above £260,000 and below £360,000 should consider whether they should amend their contributions to make full use of their annual allowance.

The annual allowance for Partners with income in excess of £360,000 is £10,000 for 2024-25 and, if they have not already done so, they may need to reduce or suspend regular contributions to avoid exceeding the annual allowance and incurring a tax charge.

Partners should check what unused annual allowance capacity they have in the previous three years and whether they can utilise it in the current year.

What if estimated profit shares are anticipated to be higher?

One of the challenges for Partners is that profit shares for the tax year are not usually disclosed until several months after the year end and this creates a challenge in trying to estimate earnings when determining pension contributions. It is recommended that accountancy guidance is sought to fully understand how any changes to taxation may affect your personal situation.

Where Partners are, or may become, ‘high earners’ it is possible to reduce or suspend pension contributions. Most (but not all) pension plans allow this without charge and without penalty. Contributions can be made up later in the tax year, either by increasing monthly contributions or through paying lump sums prior to 5 April 2025. There is the ability to carry forward allowances for up to three prior tax years, and so any increased annual allowance can be utilised in a later year provided the Partner has sufficient relevant UK earnings.

Please note that some pension contracts have inbuilt guarantees which are conditional on premiums being paid at the same level until the planned retirement date. Where premiums are reduced or ceased, these guarantees could be lost and you should check with your pension provider or financial adviser prior to cancelling or amending Direct Debit Mandates (DDM). Some pension providers may also ask for 10 days’ written notice prior to cancelling or amending a DDM.

Conclusion

Pension contributions remain a tax efficient form of saving for retirement and where possible, Partners should ensure they maximise the amount they save into pensions.

Where income restricts tax-efficient pension contributions to just £10,000, you should consider whether these will enable you to build a fund which can provide you with the income you require in retirement.

Pension legislation and tax reliefs can be complex and careful consideration should be given prior to taking any action.

Our financial planning team can help you work out your annual allowance, any unused carry forward capacity, and then advise on adjusting your contributions accordingly. They can also help you consider other tax efficient savings vehicles which can be used towards your retirement plan.