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Pension Contributions Explained

Navigating tax-related issues can be overwhelming, which is why many people choose to work with a tax accountant for peace of mind. Careful tax planning can reduce your tax bill, but did you know that pension contributions can reduce your tax liabilities? In a bid to encourage people to save for the future, the government pays tax relief on pension contributions, allowing your retirement fund to grow at a quicker rate and your tax bill to reduce. So, let’s find out more.

How Does Tax Relief on Pension Contributions Work?

Tax relief applies to contributions to most registered pension schemes, including workplace pensions, personal pensions, stakeholder pensions and self-invested personal pensions. If in doubt, always speak to a tax advisor to see what your entitlement is. There are several ways that tax relief on pension contributions work:

Tax Relief at Source

Most people benefit from pension tax relief at source. With this, your pension provider claims the basic 20% tax relief on your behalf from HMRC and adds it to your pension. So, for a basic rate taxpayer, a £100 contribution costs you £80, with the government contributing the extra £20 in tax relief.

Tax Relief Via Self-Assessment

Higher and additional rate taxpayers must claim extra tax relief from HMRC by completing a self-assessment tax return. If you pay 40% tax, a £100 contribution will cost you £60, with £20 claimed by the pension provider. The remaining £20 can be reclaimed on your tax return.

Net Pay

With a net pay arrangement, your pension contributions are made before you are taxed. You will usually therefore pay less tax because your tax will be calculated based on a lower amount of UK earnings. With this method. You get full tax relief without having to claim it, no matter what rate of tax you pay.

Annual and Lifetime Allowance

Pension tax reliefs are great but, as you might expect, there are limits as to how much you can put in your pension pot and reap the benefits. The annual allowance is £40,000 for the 2023/24 tax year. Anything over this amount will be subject to tax. There’s also a limit to how much money you can accumulate in pensions over your lifetime without being subject to tax. This stands at £1,0733,100 for 2023/24.

How Will Pension Tax Relief Lower My Tax Bill?

Pension contributions can also help lower your income tax liabilities. Let’s say you earn £50,000 a year and contribute £5,000 into your pension pot. As a basic rate taxpayer, the £5,000 only costs you £4,000 due to tax relief at source. Therefore, your taxable income is reduced by £5,000, meaning you’ll pay tax on £45,000 instead of £50,000. So, it really does pay to keep those pension contributions rolling.

Looking for a ‘tax accountant near me’ to help with all tax issues? Then contact Ibiss & Co today. With offices in Barking, Tooting and Walsall, we’re here to offer reliable tax and accountancy advice. Speak to a professional tax advisor today for peace of mind.

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