Panama or pension? The smarter way to pay less tax
First published 18 April 2016 • Updated 25 July 2017
As part of the TaxAction 2016 campaign, unbiased.co.uk and Prudential have released a new guide. Find out how and why your pension is so effective at saving you unnecessary tax.
In early 2016 the headlines were full of the Panama papers, amid speculation as to who had been trying to trim their tax bill. The irony is, most of us fail to make full use of a huge tax-saving opportunity closer to home: our pension. There’s absolutely nothing dodgy about this one – in fact, the government actively encourages us all to make more use of it.
But the message about the tax-saving benefits of a pension doesn’t always get through. Some people may find the concepts hard to grasp, while others don’t think about pensions as retirement seems a long way off. So the new Pension Tax Guide from unbiased.co.uk and Prudential is a wake-up call. It takes two minutes to read, and by the end you’ll be looking at your pension in a whole new light.
Hats off to pension savings
As you’ll find out in the Pension Tax Guide, your pension is positively brimming with opportunities to save tax. Here’s a quick summary.
- When you pay into a pension, the government repays you income tax. This is called ‘tax relief’.
- You receive tax relief at your highest rate of income tax. So basic rate taxpayers receive 20 per cent, higher rate taxpayers receive 40 per cent, and additional rate taxpayers receive 45 per cent.
- The tax relief is added to each contribution, so from your point of view it looks like free money. For example, if a basic rate taxpayer pays in £80, it turns into £100 inside the pension.
- You can benefit from higher or additional rate tax relief even if your income is only just inside that tax band. So if you’re just over that threshold, you’re ideally placed to get exceptional value from your pension (because most of your earnings are taxed at 20 per cent but you’re getting 40 per cent tax relief).
- You can contribute up to your whole annual earnings into a pension, up to a cap of £40,000 (your annual allowance). However, you can carry over any unused annual allowance from the previous 3 tax years.
- You can even transfer other savings into your pension (within the annual allowance) to boost them with tax relief.
- Your pension fund will also grow via compound interest over the years, and this growth too is exempt from tax.
- When you draw your pension, you can take 25 per cent of the money tax-free.
To find out more about how pensions help you save tax, download the free Pension Tax Guide.
Talk to a financial adviser about building and managing your pension to deliver the retirement you want. Find a specialist retirement adviser at unbiased.co.uk.
For more tax-saving ideas, head over to our TaxAction homepage.