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Pension planning in the new tax year

News article

Publication date:

21 April 2022

Last updated:

21 April 2022


Chris Jones

The pension tax regime has remained relatively stable over the last few years, however, a new tax year always brings a fresh set of allowances to make the most of along with a few changes to consider.

The main rates of tax relief on contributions, as well as the annual allowances, remain unchanged. For those unaffected by tapering or unrestricted by the money purchase annual allowance this is generally good news, with the £40,000 allowance providing adequate scope for most to make reasonable pension provision.

For those in the decumulation phase the personal allowance and the basic rate tax band also remain unchanged at £12,570 and £37,700 so unfortunately, there is no scope to increase tax efficient income payments within these bands where they are already being fully utilised. However, the start of the tax year is a good time to review the most tax efficient way of taking money from their pension pots along with drawing from any other savings and investments clients may have.

With the freezing of the tax bands and relatively high inflation it is likely that many more clients will fall into the “60% band” where income between £100,000 and £125,140 is subject to this very high marginal rate of tax. Pension contributions remain a very attractive option to reinstate the personal allowance and reclaim this tax. For someone earning £125,140 a pension contribution of £25,140 can be made at a net cost of just £10,056.

In terms of carry forward, the relevant carry forward years are now from 2019/20 and anything from previous tax years is no longer available. However, you can’t completely ignore prior years as they may be needed to offset any excesses in the three previous tax years. Remember, for the purposes of carry forward, the income in the previous tax years is only relevant where tapering applies. It is not possible to carry forward earnings.

In relation to tapering, we enter the third tax year with the higher Threshold and Adjusted Income limits of £200,000 and £240,000 respectively. Whilst this should mean far fewer clients are impacted, remember the lower limits of £110,000 and £150,000 still apply when calculating the availability of carry forward for tax year 2019/20 and any of the three earlier tax years where relevant.

For tax year 2022/33. the main impact on pension funding is an indirect one – the increase in the National Insurance Contribution (NIC) rates and the accompanying increases in the dividend rates. Both these changes can make the advantages of pensions even greater in two key areas of pension planning, salary sacrifice and profit extraction for owner-manged limited companies

In relation to salary sacrifice the 1.25% increase in both employer and employee NICs makes it even more attractive. As well as the usual income tax relief, the additional benefit of salary sacrifice is the NICs savings for both employer and employee, made by reducing salary. Employers make their own decisions regarding how much of the NIC saving they pass onto their employees, with some passing all and some nothing at all. However, even if none, the employee will still benefit from their employee NICs savings.  

The benefits of salary sacrifice for this tax year onwards will be even greater. For employees, they will save an additional 1.25% on any of their earnings they choose to give up. Employers will save the same and may be willing to pass some or all of this onto the employee. This may lead to an increase in contributions via salary sacrifice.

The significant advantage may cause the Government to take another look at salary sacrifice arrangements, particular from next year where the tax becomes a separate charge, i.e. The Health and Social Levy. However, we are yet to see any signs of this, so it is unlikely that anything will change for this tax year at least.

For owner-managed limited companies who are in control of how they distribute funds from the company there are broadly three main ways to extract - either as salary, dividends or by making employer pension contributions. The increase in the NIC rates and dividend tax rates both make the extraction of profits via pension contributions more attractive. 

To provide a shareholding director with their immediate income needs, the company accountant will often suggest paying a minimal salary, perhaps up to the personal allowance (or in previous years the employer NICs secondary earnings limit) and the rest in dividends. As the rate payable on both the employer and employee NICs will have increased by 1.25%, this is unlikely to change, despite the increase in dividend tax rates. Therefore, advisers will usually be comparing paying further dividends with employer pension contributions at the director’s marginal rate of tax. 

Any further dividend payments will effectively result in additional corporation tax (because dividends are paid out of after tax profits) and the recipient will suffer higher dividend tax rates (assuming the tax free dividend allowance has already been used up) of 8.75%, 33.75% and 39.35%.

In contrast, a pension contribution can be made gross, and, providing it meets the usual “wholly and exclusively” rules, will be treated as a business expense. There will, of course, be tax when the pension is paid, but 25% of this is normally paid free of tax and the rest subject to income tax at the recipient’s marginal rates of income tax at the time.

Unfortunately, the Lifetime Allowance (LTA), which is frozen at £1,073,100 until the end of tax year 2025/26, remains one of the biggest challenges to retirement planning for affluent clients. For clients approaching or exceeding the LTA the benefits of continuing to fund are far less clear. The LTA can also prompt clients to take funds earlier from their pensions than they would otherwise. This is a particularly complex area of pensions planning and each client’s situation must be considered based on their specific circumstances. There are, though, many cases where funding in excess of the LTA can still provide an overall benefit and accepting the LTA charge can be a “least worst case” outcome.

The good news is that all the other benefits of pension planning remain in place and, importantly, there’s usually no need to wait until the end of the tax year. Now is a great time to start, or increase, a monthly pension contribution or make a one off lump sum to use up any remaining allowances.


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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.