What tax relief do you get on personal pensions?
If you make a pension contribution yourself from money receipted into your bank account from an employer then you will enjoy full reclaim (by the pension provider on your behalf) of basic rate tax (currently 20%). If you make the same contribution from untaxed self employed earnings then you will have no income tax to pay on that sum.
Basic rate tax reclaims are now even possible by none taxpayers - but only on contributions worth up to £3,600 gross per tax year. £3,600 would cost you £2,880 net - an uplift of £720.
Higher rate tax payers may reclaim the difference between the basic rate and the rate of tax they have to pay. This is 20% or even 30% more. They can do this by either submitting a claim to their tax inspector or via self assessment. This is so good that there is a restriction on annual contributions (normally) to £50,000 – or as little as £25,000 net cost to an additional rate taxpayer, or £30,000 net cost to a higher rate taxpayer.
For employers making pension contributions for individual saves them paying income or corporation tax on those contributions. They also avoid National insurance tax - which may make them more generous and prepared to contribute more to your pension plan than otherwise!
Pension contributions, once made, then enjoy further tax concessions. Any income or growth on investments you buy with your pension contributions is then largely tax free (although the Government is still taking Gordon Brown's tax from any dividend earnings you make).
Finally when you take your pension benefits you are allowed to have up to 25% of the total paid directly into your nominated bank account completely tax free.
Sadly the balance of your pension capital, when deployed to bring you an income for the rest of your life, is taxed as if it were taxable earnings. Still the combination of upfront tax relief worth up to 50% plus largely tax free growth over the years, AND one quarter allowed out tax free should mean that you win comfortably over any final taxation of your remaining pension income.
I would add that modern pension plans are so very flexible and low cost that you will almost have an embarrassment of choice when you come to retire. Safe in this knowledge simply concentrate on building as large a retirement 'pot' as you can. The tax efficiencies of pensions mean that I see them as one of the very best long term savings vehicles, if not the best to help you build the biggest retirement pot. By all means consider ISAs, property letting and shares to compliment pension contributions but none are as tax efficient.
Hope this helps
| 11.28.12 @ 19:36