Pensions are the most tax efficient way to save money – if you are just exceeding one of the big tax thresholds (£50,000 or £100,000) they are also a great way to keep your income below that level.
Most people have an annual pension allowance of £40,000 (those that do not are very high earners and those who have flexibly accessed their pension), although the exact amount you can personally contribute into your pension is restricted to 100% of earnings (salary, self employment or holiday lettings income) or £2,880, whichever is higher. Your employer’s contributions are not included in this limit.
Unused pension allowance can also be carried forward from the previous 3 years so long as you were a member of a pension scheme during that year.
Contributions into a personal pension scheme will be ‘grossed up’ by the pension provider, meaning that your basic rate tax relief is paid directly into your pension. Higher or additional rate tax relief on personal pension contributions can be claimed through your tax return.
Pension contributions also reduce your earnings for the High Income Child Benefit Charge (which affects those with children who earn over £50,000) and Reduced Personal Allowance (for those with earnings over £100,000). The amount of the reduction is equal to the gross pension contribution, thus if you paid £800 into your personal pension, your income for the year would actually be reduced by £1,000 (the gross contribution) when calculating these charges.
If you want advice about how to make the most of your pension contributions, or help with completing your personal tax return, please get in touch and we’ll be happy to help.
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