The beginning of a new tax year is always a great time to get organised and ensure you’re ready for the year ahead. It’s always better to set your plan in motion as early as possible to avoid a mad scramble in the weeks leading up to the end of the tax year. Here’s how to get a head start on boosting your pension savings.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Save with tax relief
Since pension tax relief is an extra added on to your pension contributions, it essentially costs you less money to save more into your pension plan. Most people get tax relief on their pension contributions, but you might receive these benefits a different way, depending on how your scheme works. Your income tax rate will help determine how much tax relief you receive on your contributions, 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers. Anything over 20% can be claimed back from the government unless you’re using a scheme like salary sacrifice or a “net pay” method of relief. Make sure to check your pension plans to figure out what kind of relief is available to you.
Max out your annual allowance
Even if you don’t earn any taxable income, you’re still eligible for 20% relief on any contributions up to the amount of income you do earn. If you earn less than £3,600, you can still get relief on contributions up to £3,600.
Don’t forget about your annual allowance of £40,000 and be careful not to exceed that amount across all your plans — personal, work, or any other third-party contributors. If you exceed the threshold you’ll be subject to a tax for any excess contributions.
If you run over or are planning to make a significant contribution that will push you over, you can take advantage of being able to carry forward any unused balance from the three previous tax years, if you have any. Spreading large contributions over several tax years is a great strategy to avoid unexpected fees.
Stick to your retirement goals
Generally, most people can contribute up to £40,000 to pensions each year and still benefit from tax relief. Unfortunately, if your income surpasses a certain point — £200,000 (£240,000, adjusted) for the 2022/23 tax year – your allowance could be tapered. This tapered annual allowance decreases how much money you can contribute to a pension by yourself and/or on your behalf before having to pay tax.
Here’s how tapering works: for every £2 that your adjusted income exceeds £240,000, your annual allowance reduces by £1. The minimum tapered allowance is a mere £4,000. With careful financial planning, you can avoid an unwelcome tax charge.
Start planning early to boost pension savings
Tax rules and legislation are always changing and there will always be rules that might pertain to you and your specific circumstances that you’re unaware of. Even something as simple as where you live in the country can have an effect on your financial situation.
For more information about how we can help you build a bigger pension, get in touch with an expert from Dental & Medical Financial Services to get a jump on planning for the year ahead.