Five great reasons to pay into a pension this tax year

Author: Huw Jones
Published: 28th February 2014

SONY DSCWe all know that saving for retirement is important. But it’s also difficult. Spend it today and it’s not possible to spend it tomorrow. The government knows that it’s both difficult and important. That’s why they give away free money and reduce tax bills for those that do save for their retirement.  Here are five good reasons why a pension contribution might be a great idea.

1.  Make the most of the £50,000 pension allowance
From 6th April 2014 the annual allowance  – the amount that can be put into a pension – drops to £40,000. A contribution of up to £50,000 is possible before this deadline.  If you have sufficient earnings to use up this year’s annual allowance you can also use any unused allowances from the previous three tax years…

2.  Sweep-up unused allowance from 2010/11
Any unused pension annual allowance from 2010/11 must be used this tax year – or it’s lost forever. This could mean a missed opportunity if you are a high earner and looking to get money into your pension.

3. Get personal tax relief at top rates
Higher or additional rate tax payers this year will secure tax relief at their highest marginal rate by making a pension contribution. That means that if you are a higher rate tax payer a gross pension contribution of £10,000 will only cost £6,000. That’s a £4,000 contribution from the Government.

4. Avoid the child benefit tax
A pension contribution could reduce (or eliminate) the new high income child benefit tax charge. Child benefit is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. A pension contribution reduces income for this purpose. The effects can be dramatic. Not only do you receive tax relief on the contribution into your pension but  you also avoid the child benefit tax charge.

5.  Recover personal allowances
Pension contributions are a great way to reinstate the personal allowance that has been reduced (or removed) due to levels of income. If a higher rate taxpayer with taxable income of between £100,000 and £118,880 makes a pension contribution that reduces taxable income to £100,000 they would achieve an effective rate of tax relief at 60%.

So these five reasons should give you a bit of insight into the advantages of getting a pension contribution in before the end of tax year, but paying less tax should never be the sole reason for making a pension contribution. However if you want to put money away to spend in retirement then a pension contribution might be a good idea.

Finally a word of caution: the rules surrounding pensions and pension contributions are complex. In fact they are very complex and HMRC are a pretty unforgiving organisation – even for honest mistakes. It’s always a good idea to speak to someone who knows what they’re taking about before you rush in to beat the deadline.