One of the biggest benefits is the tax relief you can receive on pension contributions.
Basic rate taxpayers will receive tax relief at 20% on up to £60,000 a year of contributions, but remember, you cannot receive more in tax relief than you pay in tax in a single year.
To make a £100 contribution to your pension, you would need to pay £80 into the pot, and the Government would add £20 in tax relief. But the good news is that the amount of tax relief you receive is paid at your marginal rate. So, if you are a 40% taxpayer, then you would need to put £60 into your pension and the Government would put in £40 to make it up to £100. Additional rate taxpayers, who are paying 45% tax, will pay £55 into their pension with tax relief of £45 from the Government to make up £100.
Anyone earning above £100,000 will see their personal allowance of £12,570 removed at the rate of £1 for every £2 earned above this level. It means that by the time you have earned £125,140, your personal allowance will have reduced to zero. Thanks to a quirk of the system, this means that someone in this position will have an effective contribution of 60% from the Government, as all contributions are paid from gross salary. This can reduce the income level for the calculation of the reduction in the personal allowance.
You should mop up as much of the tax relief as you can before April 5 for the current tax year. But if you didn’t maximise your contributions in the last three years, you can also use something called ‘carry forward’ which allows you to use up any additional tax relief that remains unused in these previous years.
Stay Informed and Financially Prepared
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