Unless you want to work for the rest of your life, you need to plan your finances accordingly. There are lots of different ways you can save for your retirement, with a pension being a standout choice.
Paying into a pension has many benefits, namely providing a regular income in old age. However, did you know there are also several tax benefits of paying into a pension? If not, keep reading to find out more.
What is pension tax relief?
With a pension, you can actually pay less tax.
When you make pension contributions, a percentage of the income tax you would have paid to the Government goes into your pension pot instead. This is known as pension tax relief.
Basic rate taxpayers are entitled to 20% tax relief, while higher rate taxpayers are allowed 40-45%. The amount you can pay in each year depends on your earnings and it is capped at £40,000. After that, you’d have to pay tax on your contributions.
How to claim pension tax relief
If you’re employed, you’ll likely have an automatic Net Pay arrangement. In this case, your employer will deduct your full pension from your gross salary. You’ll then pay income tax on your earnings minus your pension contribution.
The other type of pension tax relief is Relief at Source. This applies to all personal pensions. Your employer will deduct 80% of your pension contribution from your net pay and your pension provider will then claim 20% back from the government.
Higher rate taxpayers must claim tax relief via a tax return.
Additional tax benefits
- Even if you don’t earn enough to pay tax, you’re still entitled to pension tax relief. Save up to £2880 per year and get a 20% top-up from the government.
- Once your pension contributions are invested, your pension funds can grow faster than other investment funds subject to tax (minus dividends on shares).
- When you’re 55, you can usually you can take out up to 25% of the money you’ve paid into your pension as a tax-free lump sum.
Looking for pension advice?
At UWM Accountants, we recognise the importance of paying into a pension regularly. If you don’t have one, we suggest you set one up as soon as possible.
Not sure where to start? We work in partnership with an independent financial advisor, who can guide you through the process and we offer auto enrolment services too. Contact us today to get the ball rolling and find out how you can plan for a brighter future.
