Are you taking enough steps, now, to prepare for your tomorrow?
Retirement is a long-held dream for many professionals: the chance to finally switch off from the corporate world, travel the world, embrace pursuits of passion, spend quality time with family and explore hobbies. Yet a growing number of retirees do not have adequate pension savings in place to sustain their planned retirement income, according to a 2021 Standard Life report.
As the cost of living continues to rise, extra pressure will be placed on future retirees in the UK to maximise their wealth during their working lives in readiness for whatever the future holds. Tax relief is one of the key benefits of using a pension to save for your retirement.
How pension tax relief works
Every time you pay into a state pension scheme, a proportion of the money that would have normally gone to the government counts towards your pension instead. This ‘tax relief’, which is calculated based on how much income tax you pay, can be valuable in terms of boosting your future savings.
You can get pension tax relief in two ways. The first is ‘relief at source’ – this is where your employer deducts tax from your earnings and deducts your after-tax pay, and then claims 20% in tax relief direct from the government which is added to your pension pot. The second route is ‘net pay’ – this is where your pension contributions are made before you are taxed; travelling down this road, you would then pay tax on your UK earnings minus your pension contribution. Both options have their advantages and disadvantages.
Limits on pension tax relief
While there is currently no cap on how much money can be saved into pension schemes each year, there is a limit on how much can be saved towards a pension annually with tax relief applying and before tax charges begin to kick in. This varies depending on whether or not you are considered to be a higher rate taxpayer, as well as the amount that you wish to invest annually; the annual allowance for the majority of UK taxpayers that is eligible for tax relief is £40,000. Higher rate taxpayer are able to claim further tax relief (at the higher rate) direct from HMRC via their self-assessment tax return.
Limits on pension pots
There is currently no limit in terms of how much can be built up in a pension point, however there is a lifetime allowance limit of £1,073,010, which is the amount you can accrue before having to pay a tax charge when accessing your pension. This figure, which the government intends to keep in place until at least April 2026, is the limit before a tax charge of 25% applies if the pension is paid as income, or 55% if it is paid as a lump sum.
When to claim pension tax relief
It may be possible to claim tax relief on pension contributions if you pay income tax at a rate above 20% and your pension provider claims the first 20% for you via the ‘relief at source’ method. Pension tax relief can also apply if someone else pays into your pension scheme on your behalf, or if your pension scheme is not set up for automatic tax relief. Additional tax relief can be claimed on your self assessment tax return for money that is invested into a private pension, provided that certain criteria is met.
Need further guidance?
As your business grows, are you fully considered how to maximise your wealth today whilst saving tax? Here at Gooding Accounts, we have partnered with Thomas Porter Wealth Management to provide practical and honest financial advice and support to our customers to prepare for tomorrow. Contact us if you would like to know more.
Our friendly and helpful approach to accountancy, ensures that you understand and are in tune with your finances. Our committed team will communicate with you every step of the way so that you understand the position of your financial affairs – get in touch today.