Pensions can be a tax-efficient way to save for your retirement whenever that may be. The addition of tax relief boosts the money you pay in to your pension and can help your pension pot grow further. All pensions benefit from tax-efficiency but how they get that tax benefit depends on the type of pension you have.
Maximising how much you pay in to your pension in the years before retirement can immediately boost the size of your fund with the addition of tax relief.
If you’re a UK taxpayer, in the tax year 2020 -21 the normal rule is that you’ll get tax relief on your pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.
For example, if you earn £20,000 per year but put £25,000 into your pension pot you’ll only get tax relief on £20,000.
If you earn £50,000 and want to put that amount in your pension scheme in a single year, you’ll normally only get tax relief on £40,000. Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay. This may be avoided through something called ‘carry forward relief’ which we would be happy to discuss with you.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
The Financial Conduct Authority does not regulate taxation advice.