Your pension could help you pay less tax – ‘dip under’ higher earnings thresholds

Making pension contributions through work can be a useful way to build up someone’s retirement pot. It could also come with the extra benefit of a reduced tax bill.

Adrian Lowery from Bestinvest and Louise Higham from Tilney, Smith & Williamson, provided some insight on two key tax benefits that could come from pension saving.

Mr Lowery urged Britons to make the most of the pension tax reliefs which are available to them.

He said: “Tax relief boosts the value of your pension pot immediately, so cannot be ignored.

“It is granted automatically at 20 percent of the amount going into your pension.

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He continued: “The higher-rate taxpayer is getting £100 in their pension pot for a net cost of £60 after the tax reliefs. That is effectively a 66.7 percent return before any investment growth.

“Workplace schemes vary in how they administer this, so some higher-rate taxpayers in company pensions and the majority of SIPP holders will have to take steps to claim back their extra tax relief.”

As well as providing valuable tax relief, pension saving may also help someone to drop a tax band by upping their pension contributions.

Mr Lowery explained: “At some companies the tax benefits could be even greater as they may allow employees to reduce salary or bonus payments in lieu of increased pension contributions.

She said: “If you are close to the £50,271 earnings threshold where the higher 40 percent tax rate kicks in, you could dip under it by using salary sacrifice pension contributions so you don’t end up paying excessive marginal tax.

“It sounds too good to turn down, but there are disadvantages to agreeing to a lower salary, such as affordability calculations when it comes to applying for a mortgage.

“Employee benefits such as life cover, and holiday, sickness and maternity pay could also be affected. As could possibly, in the long term, one’s NIC record and state pension entitlement.

“Employers offering such schemes should provide you with personalised calculations of how it will affect your take-home pay and benefits, and how it will boost their contribution to your pension if at all.”