The UK government’s budget announcement in November 2022 surprised many when it did not change the tax relief on personal pension contributions. This is a good time for individuals to consider making personal pension contributions to take advantage of the current generous reliefs.
Tax Relief on Pension Contributions
If you have made personal pension contributions in the past, you would have received tax relief at your marginal rate of tax. In relation to personal pension schemes, tax relief works by providing a 20% relief paid to the pension provider for any contributions made. For higher and additional rate taxpayers, additional relief can be obtained at their marginal rate of tax by submitting a tax return.
Making personal pension contributions is an efficient way to avoid paying taxes at high marginal rates. Similarly, employer or company contributions can help individuals save on corporation tax and avoid tax on dividends as part of their profit extraction strategy. Nevertheless, limits on pension relief do apply.
Calls for Standardisation of Tax Relief
There have been calls for standardising tax relief so that everyone gets the same amount, regardless of their income level. There is an argument that the current system provides individuals with higher incomes with a greater incentive to make pension contributions compared to those with lower incomes. However, the implementation of a standard relief rate would increase tax relief for some but drastically reduce it for others.
Potential Changes in Tax Legislation
With a clear need to raise taxes and an ideological reason to change the method of giving tax relief on pension contributions to make the system fairer, the current method of giving tax relief may be an easy target for the chancellor. However, the Conservative Party has pledged not to raise headline tax rates during this term.
Saving Tax through Personal Pension Contributions
One of the simplest ways to save tax is to make a pension contribution. Although there are limitations on the amount one can contribute to a pension, it is recommended to make personal contributions while the tax reliefs are still available in their current form and prior to any future changes in tax legislation. The upcoming deadline for making contributions is 5th April 2023.
Seeking Independent Advice
When considering making personal pension contributions, it is highly advisable to seek independent advice from a qualified financial adviser who can help you make investment decisions based on your individual circumstances.
Please do not hesitate to contact Southside Accountants in Wimbledon for support.
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