Making End of Tax Year 2020/2021 less taxing! (part three – pensions)

The 2020/2021 tax year officially ends on Monday 5th April 2021. The final instalment of this three part blog focuses on pensions. Read them all to discover ways you can make the most of your money by using tax relief.


Utilise Personal Pension Tax Relief

Tax relief is one of the main advantages to using a pension to save for your retirement. The government will add basic rate (currently 20%) tax relief when you contribute into a personal pension up to £40,000, the current annual allowance.

For instance, to contribute £10,000, you put £8,000 into your pension and the government adds £2,000. You qualify for basic rate tax relief if you’re a UK tax payer under 75.

If you are a higher rate or additional taxpayer, you could get extra tax relief on top of the basic rate amount. Higher rate taxpayers (paying 40% tax) can claim up to a further 20% through their tax return. Additional taxpayers (paying 45% tax) can claim up to a further 25% through their tax return.

The ‘Carry Forward’ rule can also let you take advantage of any unused allowance from the three previous tax years.

Personal Allowance

Pension contributions reduce an individual’s taxable income. In turn, this can have a positive effect on the personal allowance for higher earners, resulting in a lower tax bill. An individual pension contribution that reduces income to below £100,000 will restore your full tax-free personal allowance. The effective rate of tax relief on the contribution could be as much as 60%.

Business Owners

If you’re a director of a business, taking significant profits as pension contributions could be an efficient way of paying yourself and cutting your overall tax bill.

The tax and NI savings can go into the director’s pension fund and the company can also benefit from corporation tax relief.

Bonus Sacrifice

Another option is to ‘exchange’ a bonus for an additional employer pension contribution before the tax year end. The employer and employee National Insurance savings made could be used to boost pension funding. This would give more in the pension pot for every £1 lost from take-home pay.

Boost Family Wealth

You can also pay up to £3,600 into the Personal Pension Plan of a non-tax payer such as a non-working spouse or a child under the age of 18.

As with your own pension, you would be entitled to pension tax relief on any contributions made. This means you would only need to contribute £2,880 of your own money to reach the £3,600 annual limit, as the government would add the extra £720.

Effective tax year end planning is a year round job, but it’s only at the end of the tax year that you have the view to put your plans in place. Do act soon to meet the 5 April deadline.

Remember that the value of investments and any income received from them can fall as well as rise and you may not get back what you invested. Most investments should be considered as a medium to long term commitment, meaning you should be prepared to hold them for at least 5 years. Past performance is not a guide to future returns.

Tax rules may change in the future, and the value of tax reliefs depends on your own personal circumstances. This article is not personal advice.

> Read part one of ‘Making End of Tax Year 2020/2021 less taxing! (part one – allowances)’

> Read part two of ‘Making End of Tax Year 2020/2021 less taxing! (part two – pensions)’

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