How to maximise your pension before the end of the tax year
As the end of the tax year approaches on April 5, savers have a few days to maximise their pension contributions tax allowance.
Private pension contributions are tax-free up to a limit, under a regime that applies to workplace pensions, personal pensions (such as SIPPs) and overseas pension schemes that qualify for UK tax relief.
The cheapest Self-Invested Personal Pension (SIPP) providers
The UK government advises checking with your provider if your overseas scheme qualifies for this allowance.
Savers will normally pay tax if their pension contributions exceed 100 per cent of their earnings in a year or if they exceed an annual allowance of £60,000 of pension contributions per tax year—whichever is lower.
This annual allowance can be lower if you have flexibly accessed your pension pot or if you are a high earner.
The government tops up any pension contributions with tax relief.
How much of a boost you can get depends on the amount of income tax you pay.
For example, if you pay income tax at the basic rate of 20 per cent, you can get a 20 per cent top-up from the government on your payments into your pension plan.
Tax relief for higher and additional rate taxpayers is paid at a rate of 40 per cent and 45 per cent respectively.
Look at unused pension allowances
With days to go until the end of the tax year, time is of the essence if you are to capitalise on this year’s annual allowance.
You can set up a private pension using providers such as Hargreaves Lansdown, AJ Bell or Vanguard.
Aberdeen’s interactive investor* has been ranked as one of the best Self-Invested Personal Pension (SIPP) providers in the UK.
But your annual allowance isn’t gone forever, should you fail to use it up in this tax year.
You can carry forward unused pension annual allowances from the previous three tax years, as long as you are part of a pension scheme.
You do not need to report this to HMRC.
“Especially for big earners, carry forward is going to be essential,” says Joe Akik, wealth manager at Capital Planning Partners.
“When you’re in the position when you’ve bought the property that you want to be in, you don’t really have any other aspirations or goals, the next big thing is going to be retirement”, he continues. “Maxing out pensions is pretty important, and benefiting from that tax relief that you’re going to get.”
The pension annual allowance starts to taper down for those earning both a ‘threshold income’ of over £200,000 per year and an ‘adjusted income’ of over £260,000.
This can reduce the allowance to as low as £10,000, leaving high earners with limited pension allowance to use for the year.
“For those individuals, it’s really important to go back and use the previous years where they may have been earning under that and they’ve got access to more of their pension allowance,” Akik says.