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Ten tips for pension tax savings

A tax-efficient way to invest – pension contributions are paid net of basic rate tax. This means that you only need to pay £80 to get £100 invested into your pension.

PRLog - June 1, 2012 - BELFAST, U.K. -- Higher rate and Additional rate tax relief – if you are a higher-rate taxpayer, you may be able to claim additional tax relief, depending on how much you earn over the higher-rate tax band.

Make hay while the sun shines – the top tax rate for high earners will fall from 50% to 45% from April 2013. If you pay tax at the highest rate, you should consider maximising the tax benefits arising from your pension contributions before the top 50% tax rate is cut.

Annual allowance - you can save as much as you like into your pension scheme(s). However, the most you can contribute to your pension each year whilst receiving tax relief is either 100% of your earnings or £3,600 (whichever is greater), subject to an annual allowance of £50,000. Contributions paid by your employer also count towards the annual allowance.

Carry it forward – if you want to pay more than £50,000 into your pension in a year, you can carry forward any unused annual allowance from the previous three years to the current tax year, and add it to your annual allowance for the current year.

Don’t lose out – even if you are a non-taxpayer, you can pay into a personal pension scheme and receive tax relief at the basic rate on the first £2,880 you pay in.

Family ties – you can pay into the pension schemes of your spouse, civil partner, child or grandchild. They will benefit from tax relief at the basic rate, and this will not affect your own tax bill. These contributions might also prove helpful for inheritance tax planning.

A lump sum – subject to the rules of your pension scheme, you can draw out a tax-free lump sum of up to 25% of your pension fund from the age of 55, as long as your total pension savings fall within the “lifetime allowance”, which currently stands at £1.5m for the tax year 2012/13.

Flexible drawdown – you may be able to withdraw income from your pension fund, as long as you already receive a secure annual pension income of at least £20,000, and have finished saving into pensions.

Gains without pain – pension funds do not pay tax on investment income or capital gains.

Paul Dixon FPFS
Chartered Financial Planner

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