From declaring the child benefit charge to saving tax through salary sacrifice, there are a number of tax advantages and pitfalls when it comes to retirement saving - here are 10 devilish details all savers should know about.
The government's fiscal year is coming to an end next month and as savers scramble to make those last minute tax savings Adrian Lowery, personal finance expert at Bestinvest, and Louise Higham, chartered financial planner at Tilney, Smith & Williamson, have drawn up a list of benefits and dangers everyone should be aware of, this tax year and beyond.
"It pays to know about how pensions are treated by the taxman right through the saving journey and beyond retirement," said Lowery.
"Not least because if the UK’s public finances don’t improve then some of the tax reliefs may well be diluted in the future – just as personal allowances have been eroded and frozen in recent years."
1 Making the most of pension tax reliefs
Tax relief boosts the value of a pension pot immediately, so it cannot be ignored, said Lowery and Higham.
It is granted automatically at 20 per cent of the amount going into a pension, while higher-rate taxpayers can claim back an extra 20 per cent and additional rate taxpayers 25 per cent, whether that is through their annual self-assessment tax return or their workplace pension.
This means a higher-rate taxpayer is getting £100 in their pension for a net cost of £60 - a 66.7 per cent return before any investment growth.
However, workplace schemes vary in how they administer this, so some higher-rate taxpayers will have to take steps to claim back their extra tax relief.
2 Dropping a tax band by upping pension contributions
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, the pair said.
So-called salary sacrifice entails the employee agreeing to a lower gross income and the employer paying the difference into a pension alongside their usual contributions.
Both employee and employer will as a result pay lower National Insurance contributions, which are set to rise in April.
Higham explained: "If you are close to the £50,271 earnings threshold where the higher 40 per cent 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."
But she warned there were disadvantages for some, 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 one’s NIC record and state pension entitlement in the long term.
3 Watching out for allowances
Savers who are able to lock away their money until the minimum pension access age should seriously consider any available tax advantages, but there are ceilings on what can be saved tax-free, the pair said.
There is the annual personal allowance of £40,000 (2021/22) for pension savings, as well as the tapered annual allowance affecting the highest earners, which can reduce the allowance to as little as £10,000.
