Pension tax relief is a government scheme that is designed to encourage people in employment or self-employment to save for their retirement by supporting them with contributions towards their pension.
Types of pension tax relief
There are many types of pensions, including personal pensions, workplace pensions, self-invested personal pensions (SIPP) and stakeholder pensions. Likewise, there are various ways in which an individual can benefit from pension tax relief. The most common are:
1. Tax relief at source. In this instance, the pension provider claims 20% tax relief directly from HMRC and adds this to an individual’s pension pot.
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Tax relief via self-assessment. This is more common for those in self-employment as the individual assumes responsibility for claiming tax relief when completing their self-assessment tax returns.
How much help is available?
There is a cap on the 2023/24 annual tax relief allowance of Ł60,000. This limits the maximum pension contribution which qualifies for tax relief that any individual can make.
Typically, employed individuals will benefit from a 20% tax relief whilst self-employed individuals in the 40% tax bracket can benefit by up to this amount in tax relief.
How does tax relief work?
Tax relief received on pension contributions reduces your income tax liability by reducing the value of your taxable annual income. This particularly impacts higher rate taxpayers but with the support of an accountant such as https://www.randall-payne.co.uk/services/accountancy/tewkesbury-accountants/, anybody can save in the present whilst investing in their future by using their unused allowance from previous years, buying into company salary sacrifice schemes and transferring investments into a SIPP.
Are there any drawbacks?
You should discuss your individual circumstances with your chosen accountant. From Thurso to Tewkesbury accountants are well-placed to provide tailored advice to maximise your wealth. They will advise as to whether claiming pension tax relief will affect any tax credits or benefits that you are receiving and recommend the most appropriate manner in which to claim.
In conclusion, pension tax relief is a sensible and legitimate way of maximising your long-term financial security. Speak to your accountant today to find out more.