Savers have less than a week to go to boost their pension savings before the end of the tax year on April 5.
As such, pension experts are urging people to make the most of their pension plan’s tax benefits before the tax year is up to maximise their savings. According to Standard Life, it’s possible to boost your pension by getting your tax-free Personal Allowance back. The standard Personal Allowance threshold refers to the amount of income you can earn before having to pay tax on it and it is currently set at £12,570.
Those who earn between £12,571 and £50,270 pay a tax rate of 20%, those who earn between £50,271 and £125,140 pay a 40% tax rate, and those who earn over £125,140 pay a 45% tax rate.
If your income is more than £100,000 it decreases, so for every £2 you earn above this amount you lose £1 of your tax-free Personal Allowance.
But Standard Life says it may be possible to recover some – or all – of your Personal Allowance by making one payment into your pension plan.
By doing so, you effectively reduce your ‘adjusted net income’ – the total taxable income before any Personal Allowances – which allows you to make both tax savings, and put money towards your retirement.
His Majesty’s Revenue and Customs (HMRC) says: “Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:
- trading losses
- donations made to charities through Gift Aid – taking off the ‘grossed-up’ gift-aid amount
- pension contributions paid gross (before tax relief)
- pension contributions where your pension provider has already given you tax relief at the basic rate – take off the ‘grossed-up’ amount.”
So if you pay into your pension plan you may be able to get your tax-free Personal Allowance back, but bear in mind that your ability to recover this is dependent on how much money you decide to pay in.
Standard Life explains: “5 April is the last day of the current tax year – and there are things you can do to make the most of your pension plan’s tax benefits before then.
“You usually have a ‘Personal Allowance’, which is the amount of income you don’t have to pay tax on. For most people, it’s £12,570. So if your income is £30,000, you normally won’t need to pay tax on £12,570 of that.
“When your taxable income is more than £100,000, your Personal Allowance is reduced by £1 for every £2 above this amount. So you lose the Personal Allowance once your income is £125,140 or more.
“You might be able to recover some or all of your Personal Allowance by paying into your pension plan (depending on how much you pay in), as this can reduce your ‘adjusted net income’. So you’re making tax savings and putting money towards your future.”
