We like to provide our clients with ‘added value’. The following is another useful ‘tax tip’ that could save significant tax in the right hands….
Pensions regularly get knocked in the national press and you can often be forgiven for questioning the merits of a pension. But from a tax perspective, pensions are the best deal in town and a great tax planning tool.
Tax relief on pension contributions is the carrot to encourage people to save for their retirement. In general, more can be gained from the tax relief someone gets when they put money into a pension than in the tax they pay when they take their money out.
All but the extremely wealthy (or the unadvised!) will not pay higher or additional rate tax on pension income. Therefore, getting the higher or additional rates of income tax relief on the money you invest into a pension is key. There is also a way of generating 60% tax relief on pension contributions.
For every £2 someone earns above £100,000 they lose £1 of their personal allowance. By the time they’ve earned £125,000 (for the 2019/20 tax year) their personal allowance is completely gone.
You can claim that personal allowance back by making a pension contribution. If the same individual with earnings of £125,000 makes a £20,000 net (£25,000 gross) pension contribution into a personal pension, they would reduce their tax bill by £10,000 (claimed back via Self-Assessment) and receive £5,000 in basic rate tax relief into their pension. That gives a total of £15,000 tax relief on the £25,000 earned above £100,000. That is 60% tax relief.
If you require any further information, please contact your usual MFP consultant.