Are you missing this important personal pension tip?

Saving for retirement can feel like an overwhelming task, particularly if you’re working full-time, supporting your family, and focusing on your wellbeing simultaneously.

It may be that you are diligently paying into a personal pension with the goal of building a secure financial future. You could do this through your employer or manually if you’re self-employed. Even if you are very disciplined about paying into your pension, you might be missing out on an easy way to boost your retirement savings.

Tax relief.

Indeed, you may already be familiar with this “tip” in some way, as the government will automatically apply basic-rate (20%) tax relief to your pension contributions. Yet if you’re a higher- or additional-rate taxpayer, you could be missing out on “free money” without even realising it.

Keep reading to learn more.

How pension tax relief works, and who gets it

Tax relief “at source” is essentially a boost to your pension contributions, which the government provides by effectively giving back the Income Tax you have already paid on the money you’ve earned and contributed.

Step-by-step, benefiting from tax relief at source looks like this:

• You earn money and pay Income Tax on it.
• You pay some of this money into your pension.
• The government essentially “refunds” the basic rate of Income Tax you have paid on your pension contribution, by providing 20% tax relief.
• This means every £100 contribution only “costs” you £80.

You may not even realise this is happening as it tends to be a background process.

If you’re on a salary sacrifice or net pay arrangement, you or your employer will make contributions before Income Tax is applied. So, tax relief doesn’t apply, as there is no “refund” due from the government. That said, your Income Tax bill is likely to be far lower in these instances, as it’s applied to your earnings only after pension contributions have been made.

The following points only apply to those making pension contributions at source, not if you’re on a net pay or salary exchange agreement.

Higher- and additional-rate taxpayers are entitled to their marginal rate of relief, but you have to claim it

Higher- and additional-rate earners pay Income Tax at 40% and 45% respectively on the upper portions of their earnings.

If you’re in one of these tax brackets, you are entitled to your marginal rate of tax relief on your pension contributions, but you have to claim this through self-assessment even if you are employed.

For example:

• If you are a higher-rate taxpayer, then you can claim an additional 20% tax relief on your personal pension contributions.
• If you are an additional-rate taxpayer, then you can claim an extra 25%.

So, pension contributions would only “cost” a higher-rate taxpayer £60, or £55 for an additional-rate taxpayer.

Failing to claim this additional tax relief could mean missing out on thousands of pounds over your working lifetime. Standard Life reports that earners left £1.3 billion unclaimed between the 2016/17 and 2020/21 tax years.

So, it may be worth self-assessing annually in order to bolster your pension with this free government top-up. Over time, this boost to your pension fund could accumulate significantly and help you achieve your retirement goals.

Remember to keep accurate records of all your contributions so that, when the time comes to self-assess, you can easily declare your contributions and earn the correct amount of tax relief.

You can claim tax relief for the four previous tax years, so it’s worth looking back over your earnings and seeing how much you can boost your pension by.

Of course, the value of your pension pot can fluctuate over time, as your pension is invested. Even after boosting your contributions through tax relief, your fund could still decline in value over the short term. If you are concerned about investment volatility within your pension fund, speak to a Financial Planner to gain reassurance about the long-term value of your fund.

Bespoke financial planning could help you make the most of your earnings and support your future

Tax relief isn’t the only thing you can employ to ensure you gain the most value out of what you earn.

By working with an independent Financial Planner, you can stay ahead of any legislative changes and adapt your financial behaviours and habits towards your all-important goals.

Our Planners can help you:

• Take a broad view of your tax situation, finding ways to mitigate your bill where possible
• Manage your pensions, investments, and cash savings effectively
• Adapt your plan to any changes that happen in your life, including retirement, divorce, remarriage, the death of a loved one, or a change in employment
• Cope with the rising cost of living, including if you’re supporting others, such as paying for education or later-life care
• Form a strategy that helps you achieve your ambitions over the long term.

Get in touch with us to find out more, whether you’re new to PenLife or are an existing client.

Email us at enquiries@pen-life.co.uk, or call 01904 661140 to learn more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.

The Financial Conduct Authority does not regulate tax planning.