Pension tax relief is one of the most valuable tax breaks available and every individual who is a UK resident, under age 75, can benefit. The government encourages this saving as a means to support retirement planning in a country with a growing older population, and subsequently pays part of your contributions in the form of tax relief.

Some changes could be applied following the Budget 2016, where some tax payers would win and some will lose out. Make sure you know your options before 16 March to ensure you are maximising your tax position.

Pension tax relief – how does it work?

Under current rules as much as 45% tax relief is available.

When you contribute to a pension:

• The Government automatically pays 20% of the total contribution.
  • For example if you pay £8,000, the government adds £2,000 to make the total contribution £10,000
• 40% (higher rate) taxpayers can reclaim up to 20% of the total contribution through their tax return.
  • In this example, another £2,000 – reducing the effective cost to £6,000
• 45% (additional rate) taxpayers can reclaim up to 25% of the total contribution through their tax return.
  • In this example, another £2,000 – reducing the effective cost to £5,500

To receive the full 40% or 45% relief you must pay enough tax at those rates.

ALERT – Possible changes in the Budget 2016

The Budget is scheduled for 16 March 2016 and pensions is always a topical subject for budget announcements.

Higher rate taxpayers could save thousands by bringing forward contributions

The Government is considering introducing a new flat rate of between 25% and 33%, potentially with immediate effect. If this goes ahead those tax payers who are subject to tax at 40% and 45% will be worse off, and, potentially bringing forward any pension contributions into the 15/16 (current) tax year, could save thousands.

Basic rate taxpayers could be better off waiting

If the proposed changes go ahead then the implication for basic rate tax payers is that the tax relief available to them would rise, to between 25% and 33%.

As a result it may be worthwhile for basic rate tax payers to delay investment resulting in paying less to have the same amount in your pension.

If no changes are announced, or introduced at a later date, the allowance can still be used before 5 April 2016.

What is the most that can be invested?

£40,000 is the annual allowance, including any made by an employer. It is also possible to carry forward unused allowances to contribute to the pension, however, for this to apply, you must have held a pension in each of the years from which you are carrying forward the allowance.

To receive tax relief the contributions must be no more than earnings in a year.

Specialist tax planning for contractors

March is an essential month for tax planning, to ensure you have maximised all opportunities to save tax before the year-end.    

AJN Accountants are specialist contractor accountants and can help you and your business become more tax efficient.

40% Taxpayers – How much could you save by acting now?

Based on a £40,000 pension contribution

Act now and you could save up to £6,000!!!

45% Taxpayers – How much could you save by acting now

Based on a £40,000 pension contribution

Act now and you could save up to £8,000!!!

The value of pension planning

Of course, there is no guarantee that pension legislation will feature in the Budget this year, however, March is an essential month for financial and tax planning, ensuring you have maximised all opportunities to put yourself and your business in a better position for the future.

Whilst money in a pension is not usually accessible until you reach age 55 (57 from 2028), it is a long-term approach to ensuring you will be comfortable, financially, when you cease working.

More will be revealed in the coming weeks and following the Budget.