“Well, There’s Fundamental different tax advice on the timing of pension contributions coming up in a couple of years’ time Lyra!” said Jonathan while we were out for a walk at the weekend.
I thought, “Well, That’s Funny, here we are out for a lovely walk and Jonathan appears to be more exercised by thinking about the Budget announcements! Heigh Ho, better run with it, I suppose if it makes him happy! I think Lockdown has finally got to him!"
Effective Tax Planning
Jonathan explained to me that the key to effective tax planning is all about timing and making sure that the tax tail does not wag the dog. Now, my tail is always wagging, which is probably why I am in charge of barketing, not tax planning, here at Rowdens.
“Normally Lyra,” said Jonathan, “we would advise a client to make a pension contribution just before the end of the company’s financial year end, rather than just after, as this means the tax relief is obtained 12 months earlier."
Getting those biscuits early...
Jonathan could see I needed to have this explained in terms I would understand, so he said;
“OK Lyra, if your company year end is 31 March 2022 and your company gives your pension company 1,000 biscuits on 31 March 2022, those nice people at HMRC will give your company 190 biscuits on 1 January 2023. However, if you make the payment on 1 April 2022 then you will have to wait until 1 January 2024 for those extra 190 biscuits.”
So, even I can understand that a one-day delay is going to mean I have to wait an extra year to get my biscuits. Never a good idea for a hungry Labrador; so let’s hand over the biscuits early.
"So why the change in 2023?"
“Well,” said Jonathan, “for a company making profits of £100,000, a £10,000 contribution on 31 March 2023 will reduce by £1,900 the tax due on 1 January 2024; making the £10,000 contribution on 1 April 2023, will save £2,650 in the tax due on 1 January 2025; an extra £750 in tax saved for a one-day delay”.
(Please see my blog WTF 40% increase in tax rates for an explanation on the new effective tax rates post March 2023.)
OK Jonathan, got that; but one final question; what is a pension?
“Well Lyra, why do you bury your bones in the garden and then dig them up a few years later?”
"That’s easy," I said, "because they improve with age and I give up chewing them today for a better chew in a few years’ time."
“That,” said Jonathan, “has answered your question as to why you put money into a pension.”
Before making any decisions on pensions please make sure you speak to your pension adviser as advising on pensions is a regulated activity.
However, on that final note, I’m off to my basket to dream of all the extra biscuits coming my way in January 2025!
Bye for now and thank you for reading!