What is tax relief and why does it matter?
Pension tax relief basically means the taxman chips in too when I save into my pension. So, saving more into my pension can actually cost me less.
How much tax relief do I get?
Well, it’s largely based on the rate of income tax I pay.
If I pay basic rate income tax, I get 20% tax relief, so it normally only costs me £80 to save £100 into my pension.
And if I pay higher rates of tax, saving more can cost me even less. Meaning a £100 pension top-up only costs me £60 if I’m a 40% taxpayer – or £55 if I pay 45% tax.
So, are there any limits to the amount of tax relief I can get?
I can only get tax relief on my pension savings, up to the amount I earn in the tax year. So, if I earn £25,000 that’s the most I can pay into my pension and get tax relief.
I also have an ‘annual allowance’, which can limit my pension tax relief – regardless of what I earn.
- The good news is this allowance is normally £40,000 a year, so it won’t affect most people.
- And it can be even more if I haven’t used my full allowances in the last 3 years.
- But, if I’m earning over £200k or have started taking an income from my pension already, my allowance could be a lot less.
So, here are some tips to help make the most of your pension
First – think about saving as much as you can reasonably afford into your pension to make the most of tax relief.
Second, start saving into your pension as soon as you can to give your money the opportunity to grow.
Third, if you’ve got an ISA or other savings, consider putting them into your pension to get the tax relief boost.
At the moment, this normally ties your money up until you’re 55 so make sure you don’t save money into your pension that you might need to use before then.
Unsure what all of this means for you? Speaking with a financial adviser can help. Although there will be a cost for this, it could save you money in the long run.
And remember, the value of your pension can go down as well as up, there are no guarantees and you might get back less than was paid in.
Tax rules can also change and their impact on you will depend on your own circumstances.
The information here is based on our understanding at June 2020.