As we head towards the end of the tax year, here are some tips which can help make the most of the money in your pension plan before the year is up.
1. Maximise the tax relief on your pension savings
Your pension plan is one of the most tax-efficient ways to save for your retirement thanks to tax breaks on your contributions (normally at the highest rate of income tax you pay). This means it may cost less than you think to pay more into your pension plan.
If you’re a 20% basic-rate taxpayer, every £100 that goes into your pension plan costs you just £80. Higher or additional-rate taxpayers can benefit from 40% or 45% tax relief, which means £100 into a pension plan can cost just £60 or £55.
With some workplace pension plans you automatically get tax relief, but with others you don’t. For example, if your employer deducts your pension contribution before tax is collected under PAYE, you’ll get tax relief at your highest rate automatically and saving you having to make any claims through self-assessment.
If this doesn’t happen, you can claim higher and additional tax relief through your self-assessment tax return or by contacting HM Revenue & Customs (HMRC).
Tax rates can vary depending on where you live in the UK, for example Scotland has different income tax rates than the rest of the UK.
Pension savings allowance: It’s important to make sure you don’t save more into your pension plan each year than your annual allowance. You can normally contribute as much as you earn each year, up to £40,000, and get tax relief on your contributions – you can also ‘carry forward’ unused allowances from the last three years. That amount could be less if you’re a higher earner or if you have a modern, flexible pension plan and you’ve started taking money from it.
2. Make the most of your workplace pension plan
If you have a workplace pension plan, your employer has to contribute to it. Some employers even offer to match your pension contributions up to a certain percentage; so the more you pay in, the more they will too.
And if you’re fortunate to get a work bonus, you may have the option to put some, or even all of it into your workplace pension, saving you tax and potentially National Insurance too. So it can be a tax-efficient way to boost your pension savings.
3. How to get your child benefit back by paying more into your pension plan
Worth around £2,500 a year to a three-child family, child benefit is reduced by the High Income Child Benefit Charge when one parent’s income reaches £50,000. At £60,000, the tax charge cancels out the benefit entirely.
But there is a way that you could get some, or all of it back if your earnings are in this range.
Contributing to your pension plan reduces what counts as your income. This could allow you to keep your child benefit and boost your pension savings at the same time.
Use the Government’s child benefit tax calculator to work out if you’re affected by the tax and how.
Good to know: You can choose not to take child benefit payments if your earnings are over £60,000, but you should still consider filling in the child benefit claim form. This helps you get National Insurance credits, which go towards your State Pension later in life.
4. Get your tax-free personal allowance back
Most people get a tax-free personal allowance, which is £12,500 for the 2020/21 tax year. When your taxable income reaches £100,000, your personal allowance is cut by £1 for every £2 of your income. You also lose it once your income reaches £125,000 (in the 2020/21 tax year).
You may be able to recover any loss to your personal allowance by reducing your income through making pension contributions – that way you’re making tax savings and contributing more to your future at the same time.