Save tax through personal pension contributions

Despite the need to raise taxes and plug the government’s borrowing requirement, there was one surprise in the November budget – tax relief on pension contributions stayed the same.   Not a shocking headline to most but it caused a raised eye-brow or two amongst tax advisers.

To set the scene, if you have made personal pension contributions in the past you will have received tax relief at your marginal rate of tax. In recent years this would have been at 20%, 40%, 45% or 60% or at a combination of rates depending on your personal circumstances (slightly different rates apply in Scotland). 

The way tax relief works in relation to personal pension schemes is that contributions automatically get 20% relief paid to the pension provider but higher and additional rate taxpayers get additional relief at their marginal rate of tax through submission of a tax return. 

Making personal pension contributions is therefore a very efficient way to avoid paying tax at high marginal rates. Equally, employer or company contributions save corporation tax and help avoid tax on dividends for those that take them as part of their profit extraction strategy.   Of course, limits on pension relief do apply.

To some, this is an unfair system because it gives those with higher income a bigger incentive to make pension contributions than those on a lower income.  A tax that subsidises the rich some would argue.   For that reason alone, there have been calls for many years to standardise tax relief so that everyone gets the same amount no matter what their income level is.  These calls have led to debates on a proposed standard relief rate at around 25%, increasing tax relief for some but drastically reducing it for others.

Given that there is now; a clear need to raise taxes, an ideological reason to change the method of giving tax relief on pension contributions to make the system fairer and a Conversative Party pledge not to raise headline tax rates during this term, the circa £40 billion of tax relief given through the marginal rate method, may have been an easy target for the chancellor. 

How can I save tax?

Clients frequently ask this question.  One of the simplest answers is to make a pension contribution but there are limits on how much you can put into a pension and its not straightforward. If you make personal contributions, you may want to consider making them while the generous tax reliefs are available in their current form and before any future alterations to tax legislation. If that’s the case the next deadline for doing so would be 5th April 2023.

Of course, the next question often is ‘what should I invest in?’ It’s highly advisable to seek independent advice from a qualified financial adviser, who can help you make investment decisions based on your individual circumstances. 

Your TaxAssist Accountant can put you in touch with TaxAssist Financial Services to provide you with impartial, tailored advice on pension contributions.  Alternatively, you can contact TaxAssist Financial Services directly on 0800 978 8000, [email protected] or complete an online enquiry form to book a FREE consultation to discuss your needs.

Date published 9 Dec 2022 | Last updated 9 Dec 2022

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.