A business owner asks… Why do people like me lose pension tax relief at 75?
I am a 74-year-old self-employed woman and have run my own business as a sole trader for the past 35 years.
I’m not a limited company so pay income tax in full on all my profits.
Through most of those years, I rolled any profits up into savings accounts and did not pay into a pension.
For the past five or six years, I have been paying a lump sum into a self-invested personal pension every year, after a family member advised me to do this.
I am still working and planned to continue doing this until at some point I sell my business. However, someone recently told me that you cannot get pension tax relief over the age of 75.
Is this true? Will I lose the tax relief on investing in my pension after I hit 75, even if I am still working and paying tax?
Does it affect any payments made after my birthday at the end of February, or any payments after the end of this tax year?
Should I put the maximum lump sum I can afford into my pension before the deadline to get the tax relief?
Also, why do people like me lose tax relief at 75? It doesn’t seem very fair to those of us working in our seventies.
Tanya Jefferies, of This is Money, replies: Pension tax relief is such a generous boon to people saving for retirement that your frustration is understandable.
You have reached what others might consider retirement age, yet are still working and paying tax – so of course you want to receive the same perks as anyone else.
We asked a pension expert to explain why the Government cuts off tax relief when people reach the age of 75, and how you can still make maximum use of it before your birthday.
Sean McCann: As more people continue to work into their mid-70s and beyond, it’s possible we may see a change of policy
Sean McCann, chartered financial planner at NFU Mutual, replies: The Government is very keen that we all save to provide ourselves with an income in retirement. One of the ways they incentivise us is through tax relief on pension contributions.
As you are self-employed this means that for every £80 you pay into your pension, HMRC will contribute an additional £20.
If you’re paying 40 per cent or 45 per cent in income tax, you can claim up to an additional £20 or £25 respectively direct from HMRC.
The amount of extra tax relief you can claim will depend on how much of your income is taxed at the higher rates.
Why don’t over-75s get pension tax relief?
The cost to the Exchequer of providing tax relief on pension contributions is estimated to be more than £50billion a year.
Because of this, the Government limits how much you can pay in each tax year and imposes a maximum age for getting tax relief.
As tax relief is not available on pension contributions once you turn 75, many pension providers won’t accept them after this date. If you want to continue to pay in, you should check now that yours will allow you to do so.
However, at this point you might want to weigh up whether it is still worth paying into your pension.
You may intend to pass it on to your beneficiaries free from inheritance tax.
But the tax relief incentive is gone, and after taking your tax-free lump sum you could be liable for income tax on money you take out.
As more people continue to work into their mid-70s and beyond, it’s possible we may see a change of policy on the age cut-off for pension tax relief in the future.
How to defend your pension from the taxman
No one wants to save up all their working life for a decent retirement only to get stuck with an avoidable tax bill.
Unfortunately, there are many tax traps for the unwary… Read our guide on how to keep your pension as safe from tax as possible.
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What is your deadline to still benefit from tax relief?
Tax relief will only be available on contributions you make before your 75th birthday at the end of February.
The good news is you can base your contributions on your total earnings in this tax year – 6 April 2023 to 5 April 2024 – though this will necessarily be an estimate at this stage.
You can pay in up to the level of your earnings capped at £60,000. This is known as the annual allowance.
If you have earnings of more than £60,000, you may be able to take advantage of any unused annual allowance from the previous three tax years and pay in a larger amount.
To get tax relief you must earn at least the amount you wish to pay in. As an example, if you have total earnings of £40,000 in the current tax year, the most you could pay in would be £40,000.
But if you have earnings of £100,000 and have sufficient unused allowance from the previous three years you could pay in up to £100,000.
As this is your last chance to get tax relief on your pension contributions, it might be worth maximising before your 75th birthday as you suggest, but this will depend on your wider financial circumstances.
Are there any pitfalls?
The other rule to look out for is the money purchase annual allowance.
The MPAA can be triggered if you have already taken a taxable payment from your pension, for example through income drawdown or taking a taxable lump sum – in other words, most other withdrawals beyond the 25 per cent tax-free lump sum.
If you are caught by this rule, it will restrict the amount you can pay in to a maximum of £10,000 in this tax year.
Meanwhile, as well as income tax relief on what you pay in, pensions can offer other tax advantages. One key benefit is that anything left in your pension on death is normally exempt from inheritance tax.
However, turning 75 does impact how pension death benefits are taxed, so it’s important to get financial advice if you are planning to bequeath your pension.
What if you are still employed at age 75?
Although you can’t benefit from tax relief on the amount you pay into your pension after age 75, if you were an employee – even of your own company – your employer could continue to contribute to your pension, as it is they who receive tax relief on what they pay in, rather than you.
If you are over 75 and both own and are employed by a limited company, it’s best to get professional advice on how you handle pension contributions.
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