The first months of the year are always a busy time for business and individuals alike. But the end of the tax year is also an important time to be considering your pension – after all, retirement won’t pay for itself. A few moments spent thinking about taking advantage of the opportunities and allowances before the reset of a new tax year can pay dividends in terms of maximising your pension options.
Here are nine compelling reasons to consider boosting your pension pot before the 5th April deadline.
1. That’s A Relief!
If you think that you can’t get paid for saving for your retirement, you are mistaken. Thanks to tax relief, for every pound you contribute up to your annual allowance (see reason 2) the government chips in an extra 20p for basic rate taxpayers, 40p for higher rate taxpayers, and a welcome 45p for additional rate taxpayers. The more you save, the more you benefit and who doesn’t like a little extra help?
2. Do It Every Year
Everyone has an annual pension allowance, so why not use it? Currently £60,000 a year, that’s a generous sum allowing you to reduce the tax you pay, increase your pension savings, and build retirement benefits in a efficient environment. It really is a ‘use it or lose it’ scenario…almost. Which brings us to…
3. Carry It Forward
Although the annual allowance is limited to £60,000 per annum, you can actually ‘mop up’ any unused annual allowances from the previous three years. Carry forward, as it’s known, is something that many people forget, especially if they’ve not done it before. That three year period resets at the start of each tax year, so the clock is ticking if you didn’t fully use your 2021/22 allowance.
4. No Lifetime Cap
The big pensions bombshell in Jeremy Hunt’s spring 2023 budget (yes, that was two years ago) was the scrapping of the Lifetime Allowance on pension benefits, which finally came into effect this year. For anyone who capped out on the previous £1,073,100 limit, now could be the perfect time to start contributing again. And if you are thinking ‘that’s great, but I’m holding fixed and enhanced protection,’, then Reason 5 is for you…
5. Protect - and Restart
When the Lifetime Allowance was scrapped, any tax-free cash enhanced protections were ring-fenced, which means that you can restart contributions without invalidating that gold-dust protection. As a bonus, if you didn’t make any contributions last year, why not jump on Reason 3 and take advantage by carrying forward any unused allowance?
6. The Disappearing Personal Income Tax Allowance - Recovered
Those earning over £100,000 this tax year can be caught in the ‘60% tax trap’, losing £1 of their personal tax allowance for every £2 they earn. But if you increase your pension contributions to bring your salary back under £100,000, essentially converting that 60% tax rate into 60% tax relief, on earnings between £100,000 and £125,140.
7. A Worthwhile Sacrifice
Rather than splashing out on a far-flung holiday this business year-end, why not look at paying that bonus into your pension pre-April? Exchanging this for an employer contribution not only gains tax relief and enhances that tax-efficient pot but also stops you paying more tax and NI. It will also save you that awkward ‘I think I’ll be fine with the SPF20’ sunburn embarrassment.
8. The Corporation Tax Pension Dividend
This is a major one for business owners. Corporation tax rates now are now running at 25% for those companies with profits over £250,000, which is quite a sting. So instead of taking dividends at the end of this tax year (post-tax), why not contribute those profits into your pension? Because the payment originates from pre-tax profits, that’s an effective 25% rate of tax relief.
9. It’s Child’s Play
Last but not least, those earning over £80,000 can kiss goodbye to any Child Benefit - and even those earning above £60,000 will see it reduced at 1% for every extra £200 they earn. However, if you use those extra earnings to boost your pension contributions and drop your earnings below £60,000, not only will you gain the tax relief from the pension contribution, you get to keep that extra tax-free benefit for the kids.