Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
How did you see in the new year? The new financial year, that is, which began on April 6.
Just as many of us make New Year resolutions on 1 January, the start of a new tax year can be a good time to reassess and perhaps put right a few things in your financial life that you’ve been meaning to change.
A pension should be the cornerstone of your long-term saving, and it’s a good first place to look if you want to spring clean your finances. If you work for an employer that offers a workplace pension scheme, make sure you understand what the scheme can offer you and make the most of any help that’s going.
Many schemes will automatically contribute something into a pension on your behalf. But that might not be the end of what’s on offer. Many will also match additional contributions that you make, up to a certain level. If you possibly can, make sure you are maximising these matched contributions. If you need to increase what you’re saving to do that, it should be easy to do via the online portal offered by the scheme.
Money paid into a pension benefits from tax relief, so it is often the most tax-efficient place to save. When you pay money into a pension a boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return. Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest.
A good way to look at it is that it costs a basic-rate payer £80 to make a £100 pension contribution under the current rules, while a higher-rate taxpayer pays just £60 for the same effect and an additional-rate taxpayer £55.
The biggest relative benefit comes for those whose income in retirement puts them in a lower tax band than was the case during their working life and, because the system is linked to the income tax you pay, it is more generous overall to higher earners. You can read more about your pension allowances and tax benefits here.
That is even more important right now thanks to a recent change announced in last month’s Budget. Chancellor Rishi Sunak announced that some income tax bands will now be frozen for the rest of this Parliament instead of rising with inflation. It means that the thresholds for both the Income Tax Personal Allowance - when 20% tax begins - and the higher-rate threshold - when 40% tax begins - will remain where they are for the next four years.
Meanwhile, of course, the wages earned by workers will continue to rise. As a result, a greater number of people will see their earnings in the next few years rise above a new tax threshold, and they will pay a higher amount of tax on money earned above that level.
To see the effect of the change, it’s worth seeing what would happen if tax bands rose as previously planned. At the moment, workers pay no Income Tax on the first £12,570 they earn. Earnings above that level are then subject to 20% tax until the higher-rate 40% band begins for earnings above £50,270. Additional Rate 45% tax then begins when earnings hit £150,000.
|Annual earnings today||Annual earnings in four years if rising with inflation (2%)||Higher rate threshold in four years if raised with 2% inflation||Higher-rate threshold if frozen at level today||Extra tax due|
Source: Fidelity International, April 2021
There are few benefits to paying a higher rate of tax, but one is that you might be able to benefit more from the system of tax relief on pensions. The system applies tax relief at your highest marginal rate. So, if you think you might slip into the higher-rate band over the next few years you may also be able to get a higher rate of tax relief on any pension contributions you make.
If you’re looking for a New Tax Year resolution, why not make it to divert a bit more from earnings into your pension to ensure you keep more of your hard-earned money in the future.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.