Published On: Wed, Feb 28th, 2024

Tax expert says these clever pension tricks can slash thousands off your income tax bill | Personal Finance | Finance


Pensions are the secret weapon in your tax-fighting armoury, which can be deployed to reduce your annual bill to HMRC and boost your retirement pot at the same time. It’s open to most pension savers and could help some people escape brutal marginal tax rates of up to 60 percent.

Dean Butler, managing director for retail direct at Standard Life, said the end of the tax year on April 5 is just a few weeks away but there is still time to swing your pension into action and cut your liability.

One of the best ways of doing this is to pay more money into your pot, because HMRC will cut your tax bill if you do so.

Everyone can invest up as much as 100 percent of their annual earnings in a pension and claim tax relief, up to a maximum £60,000 a year.

This is called the pensions annual allowance and in the unlikely event that you have maxed out this tax year’s total, you can you can usually carry forward any unused allowance from the previous three tax years.

This is particularly useful for those whose income varies greatly from year to year, such as entrepreneurs or people who earn bonuses.

It may also benefit those who have had a large inheritance, and want to use it to top up their pension savings.

Tax relief on contributions make your pension one of the most tax-efficient ways to save for retirement, Butler said.

The government-funded top-up means that basic rate taxpayers only pay £80 for each £100 that goes into their pension.

Higher-rate 40 percent taxpayers do even better as each £100 of savings costs them just £60. They must claim the additional 20 percent relief via their self-assessment tax return. Unfortunately, many forget to do so, and lose out.

Payments into a workplace pension also attract tax relief and get a further boost from employer contributions, Butler said.

Under the auto-enrolment scheme, employees contribute four percent of their income, with employers paying three percent.

Workers also get one percent tax relief, which lifts the total pension contribution to eight percent of salary.

If you offer to pay a higher contribution, some companies will agree to match it, Butler said. “It’s worth checking with your employer.”

Anyone lucky enough to get a work bonus should consider paying it into a pension, he added. “This could save on income tax and National Insurance (NI), meaning you get to keep more of your bonus in the long run.”

Paying extra contributions could also reduce your income so that you fall into a lower tax band and pay less to HMRC. This is a valuable benefit as Hunt freezes income tax and NI thresholds all the way to 2028.

Anyone who uses pension contributions to reduce their annual taxable income below the £12,570 personal allowance threshold will pay no tax at all.

Those earning more than £100,000 can enjoy an even bigger tax benefit.

READ MORE: Andrew Neil slams mooted Budget cuts that won’t halt ‘record high’ tax revenue

They lose £1 of personal allowance for every £2 of income they earn above £100,000. Once their income tops £125,000, their personal allowance vanishes altogether. 

This is an effective tax rate of 60 percent but you can reverse this by paying surplus income into a pension. “That’s quite a significant pension perk,” Butler said.

Paying into a pension can also help families combat the brutal high income child benefit charge, which steadily reduces child benefit once one parent earns £50,000. At £60,000, the charge wipes out the benefit entirely.

Employees should check whether they can do this via a salary sacrifice scheme, if their company offers one.

People can start taking money from a workplace or personal pension once they hit age 55. Withdrawals will be added to their total earnings for that year and may be subject to income tax.

Be warned, once you start making withdrawals your pensions annual allowance will fall from £60,000 to just £10,000, under the money purchase annual allowance.

This will limit their ability to make extra pension contributions and save tax by doing so.

Every saver should fire up their pensions secret weapon, whatever Hunt does on in his spring Budget on March 6.



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