By Dean Butler, Managing Director for Customer at Standard Life
Now is also a great time to think about how you can start the new tax year as you mean to go on and you could consider putting a little more into your pension plan each month if your finances allow. With the benefits of compound interest, it all adds up, giving your savings a boost that can add real value to your pension and make a meaningful impact on your retirement.
Dean Butler’s top tips to help you give your pension plan a boost before the tax year is up:
1. Use your pension annual allowance – “Your pension annual allowance is the total amount you, your employer and any third party can pay into all your pension plans in a tax year before a tax charge could apply. The limit is currently £40,000 or 100% of your earnings in a tax year, whichever is lower. But it could be less if you’re a higher or non-earner or if you’ve already started taking money from your pension savings.
“Once the new tax year starts, your annual allowance will renew, and from 6 April it’s increasing to £60,000 – this was one of the policies announced in the recent Spring Budget. If you can afford to do so, it makes sense to consider paying more into your pension plan before then to make the most of this year’s allowance.
“If you’ve already used all of your annual allowance for the 2022/23 tax year, don’t worry – you might still have options, as you can usually carry forward any unused allowances from the last three tax years.
2. Top up your pension payments with tax relief – “Tax relief makes your pension plan one of the most tax-efficient ways to save for your retirement. This means your payments get topped up by the government, making it cheaper to save more into your plan.
“Not all pension schemes provide tax relief in the same way, although most UK taxpayers get tax relief on their own pension payments based on the rate of income tax they pay. This means most UK taxpayers will get a 20% top-up from the government on their pension payments, so it’ll only cost you £80 to pay £100 into your pension. The benefits are usually even more for higher or additional-rate taxpayers - but you’ll need to claim anything above 20% back from the government depending on how your payments are being made.
“Some workplace pension schemes offer tax benefits in a different way (salary sacrifice or salary exchange schemes, for example). So do check with your employer how this works for you if you’re not sure.
3. Take advantage of your workplace pension plan – “Workplace pension plans are a great way to save more for your future because your employer normally has to pay in too. At least 8% of your qualifying earnings will be paid in, and a minimum of 3% of that will come from your employer.
“Some employers will even match the percentage you’re paying into your plan up to a certain amount. So, it’s worth checking to see if upping your own payments could mean your employer will pay in more too.
4. Consider bonus sacrifice – “If you get a work bonus, you might have the option to put some or all of it into your pension. Doing this could save on tax and National Insurance deductions, meaning you get to keep more of your bonus in the long run. And it could be a good way to make the most of your current pension annual allowance before 5 April.
5. Get your tax-free personal allowance – “Most people get a tax-free personal allowance, which is £12,570 for the 2022/23 tax year. When your taxable income reaches £100,000, your personal allowance is cut by £1 for every £2 of your income. Currently, you lose the personal allowance once your income reaches over £125,000.
“You may be able to recover any loss to your personal allowance by reducing your income through paying into your pension plan. That way, your pension contributions will be benefiting from tax relief at a marginal rate of 60%, which is quite a significant pension perk.
6. Get your child benefit back by paying more into your pension plan – “Worth a little over £2,600 a year to a three-child family, child benefit is reduced by the High Income Child Benefit Charge when one parent’s income reaches £50,000. At £60,000, the tax charge cancels out the benefit entirely. But there is a way you could get some or all of it back if your earnings are in this range.
“Paying into your pension reduces what counts as your income, and it could allow you to keep your child benefit and boost your pension savings at the same time.
“You can choose not to take child benefit payments if your earnings are over £60,000, but you should still consider filling in the child benefit claim form. This helps you get National Insurance credits, which go towards your State Pension later in life.
“You don’t have to make all of these changes, but even taking just one or two actions can give your pensions a helpful boost and help you stay on track to meet your retirement expectations.”
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