Why saving for tomorrow can reduce the tax you pay today: Tax-efficient ways of contributing to your pension

Pension and tax legislation is changing fast and becoming more complex, but this has also created opportunities. Read on to find out how paying into your pension for the future could reduce the amount of tax you pay today.
The Government has announced that, from 2013, child allowance will cease for higher-rate tax-payers. This is currently £20.30 per week for your first-born, totalling £1,055.60p.a. But, what if you are on the cusp of higher-rate tax relief? Are there any measures you can take in order to keep the allowance? The simple answer to this is YES.

For example, let’s say that your earnings fall into the higher-rate tax bracket by just £2,000, and, as a consequence, your child allowance will cease. Well, according to a recent article by pension consultants Towers Watson, you could opt to contribute that £2,000 into your pension. If you do that, it will qualify for basic-rate tax relief at source, which means you only need to make a net contribution of £1,600 (your contribution qualifies for £400 tax relief). Pension contributions don’t count towards taxable income, therefore, making a contribution could help to preserve your eligibility for child benefit.

Another example where a pension contribution can be very effective is if you earn more than £100,000p.a. From the 2010-2011 tax year, the personal allowance reduces by £1 for every £2 of income. This means that if you earn, say £106,000, your personal allowance would be reduced by £3,000. By making a pension contribution of £4,800, you would receive £1,200 basic-rate tax relief at source. The gross pension contribution would therefore be £6,000 and your entire personal allowance would be restored. You will also be able to claim higher-rate tax relief as well.

Salary exchange is another great way of saving Tax and National Insurance. This is where you sacrifice part of your salary or bonus in exchange for some other benefit, such as a pension contribution. Whilst this may not be suitable for everyone it is well worth looking at if you want to get the most from your retirement savings.

There is more to financial planning than just taking out policies. It is making sure that you use all your pennies more effectively! As you can see, there are advantages and disadvantages to the different ways of contributing to your pension and it is important to seek financial advice to help you make the right decision. At Monetary Solutions, you can have a free consultation without obligation. We would be happy to look at your current financial situation in case we can find you more tax-efficient ways to save.  Please phone us today on 020 8760 9940.