Pre Year End Tax Planning – Pension Contributions
Following on from our summary of Pre 5 April Tax Planning Tips, we explore the opportunity of making pension contributions.
Making pension contributions is a great way to save for your retirement and can be extremely tax efficient. The majority of taxpayers will obtain tax relief at 20% on their pension contributions at source. This means for every £80 you pay, £100 will be invested in your pension fund, the additional £20 being provided by the Government.
If you pay tax at a rate higher than 20% then you can claim additional tax relief. Relief is calculated by extending the band of income taxed at the basic rate of 20% (or 21% in Scotland) by the gross pension contribution. The effect is relief at your marginal rate of tax. Relief is given by a claim in your Self Assessment tax return or by adjusting your PAYE code.
Income over £100,000 may result in the loss of some, or all, of your personal allowance. Making a pension contribution can help to retain your personal allowance as the gross pension contribution is deducted from your income before assessing if it is over £100,000.
The high income child benefit charge is also based on income adjusted for pension contributions. If your income is £55,000 but you have made gross pension contributions of £5,000 then you will be able to retain any child benefit received in full.
Remember that tax relief for pension contributions is limited to an annual amount of £40,000. If your income, including any employer pension contributions, exceeds £150,000 then the allowance may be reduced further. You should always seek advice as to the maximum contribution that can be made and the tax consequences relating to your personal circumstances.