Tax planning part 2 - Pensions
Last time we looked at how maximising the use of any ISAs we have before the end of the tax year on 5th April 2019 could help us to reduce the tax bill we’ll receive in January 2020. This time we’re looking at making the most of pension tax benefits... 

Making pension contributions 

How can paying into your pension reduce your tax bill? Basically, pension contributions reduce what is counted as your income, and therefore how much income is taxed. So pensions are a tax-efficient way to save. 

Wealth Managers Susie and Faye at the Hitchin branch of Raymond James Investment Services say: “Pension flexibility rules have made a big difference, and the tax relief on pension contributions can boost investments.

“The amount you can contribute is relative to how much you earn, and the Annual Allowance (still £40,000). However, everyone can contribute £3,600 (gross) to their pension even if they don’t have an income.”

Maximising pension tax benefits

Have you used up your annual allowance of £40,000 (up to £150,000 income)? If you haven’t hit the allowance in the last three tax years, you can pay more into your pension now and still benefit from it.

However, if you have already taken out some pension savings - and this is more than your tax-free cash allowance - then you can’t carry forward any allowances from the last three years. If you just take the cash allowance and not any of your pension income then the £40,000 allowance still stands. 

Pensions vs. ISAs for tax-free savings 

It doesn’t require as much income to save into a pension compared to an ISA. Susie and Faye say: “For a basic rate taxpayer, investing £1,000 into an ISA requires £1,200 salary before income tax (and of course national insurance). To put £1,000 into a pension costs just £800 as £200 tax relief is added. For a higher rate tax payer, the net contribution is effectively £600 as £200 is given as tax relief through your tax return.”

The world of tax and pensions can seem confusing, so if you have any questions don’t hesitate to contact us and we’ll be happy to help. 

Get in touch - If you'd like to find out more about how we can help you and your business pay less tax, generate more profits and create long-term wealth for you and your family, please get in touch now