1. Use up your annual allowance
The annual allowance is the maximum amount that you, and others on your behalf, can save into your pension each year without suffering a tax charge. Currently the limit is set at £40,000 and this includes pension funding from all sources including employer contributions. In addition, your personal contributions receive tax relief up to 100% of your earnings or £3,600 if more. The annual allowance may be less if you’re a very high earner or have flexibly accessed a money purchase pension and it may be higher if you’re able to carry forward unused annual allowances from the last 3 tax years. You can read more about the annual allowance here.
If you are able to, it’s a good idea to use up any leftover annual allowance. Once the new tax year starts, your annual allowance will renew so it’s worth topping up while you can.
2. Carry previous years’ unused allowances forward
If you’ve used up your annual allowance for the current year, you can usually carry forward any leftover from the last three years of contribution allowances as long as you had a pension in place in those earlier years. The deadline for carrying forward contributions for the tax year 2018/19 is 5 April 2022. If you meet this year’s limit and you know you have some leftover allowance from previous years, you can use this to top up your contributions before the tax-year end, starting with the 2018/19 tax year first.
3. Utilise pension tax relief
You may be able to get tax relief when you pay into your pension. This means your contributions could be topped up by the government when you pay in to your pot. The amount of tax relief you get is based on your income; basic rate taxpayers will receive a 20% top up (and non-taxpayers if the contribution is made to a relief at source plan such as a PPP), meaning if you pay in £80, the government will add £20 to top up to £100.
Higher or additional-rate taxpayers may get more and some workplace pension schemes may offer tax benefits in a different way. It’s worth checking with a financial adviser or your employer to find out the tax relief benefits that apply to you.
4. Boost your workplace pension contributions
When it comes to your workplace pension, your employer is required to contribute at least 3% of your qualifying earnings. Some employers will match the amount you put in. If you are able to, it may be worth increasing your contributions; it could mean your employer will pay more in, too.
5. Save on tax through your personal allowance
The current standard personal allowance is £12,570. This is the amount you don’t need to pay tax on. This figure decreases when your taxable income exceeds £100,000, being cut by £1 for every £2 of your income above £100,000. This means once your income reaches £125,140 (in 2021/22), you’ll lose all of your personal allowance.
However, you can mitigate this and recover losses to your personal allowance by reducing your taxable income through increasing your pension contributions. It’s a win-win as you save on the tax you pay whilst adding more to your pension at the same time.
6. Make the most of child benefit through your pension
Child benefit is paid by the government to families with children aged up to 16 (or up to 20 if they’re in approved higher education). If one parent’s income is over £50,000, child benefit is fully or partially cancelled out by what’s called the High Income Child Benefit Charge. Child benefit is fully lost once the higher earner’s income reaches £60,000 or more.
A bit like recovering any lost personal allowance, you can similarly reduce your taxable income by contributing more into your pension and potentially reduce or remove the child benefit tax charge.
Whatever you do, it’s always a good idea to seek sound financial advice before making any changes to your pension and to find out more about any allowances you’re entitled to. Here at Brunsdon Financial, we’d be happy to help.