DESPITE efforts to make it simpler over the years, the UK tax system remains very complex.

Even the rules governing our personal finances can be tough to understand if you’re not an expert, which means it’s easy to make mistakes and end up paying more tax than you might otherwise have to. But that complexity also means a little bit of knowledge can help you reduce your tax bill.

These aren’t loopholes or cheats - it’s simply using the breaks the government has designed to encourage us to save. Chief among those are pensions, which offer tax advantages if you’re willing to save money away for the future.

Here’s how you can use your pension to claw a little back from the taxman.

Pension tax relief

A big attraction of pension saving is that your contributions benefit from tax relief. Generally, the more tax you pay the more valuable tax relief will be to you.

In summary, a £1 contribution today typically costs you 80p if you live in the England or Wales and are a basic-rate taxpayer, as little as 60p if you’re a higher rate taxpayer and 55p if you pay additional rate tax. Similar costs will apply to individuals living in Scotland based on the income tax rates they pay. Exactly how it works will depend on the way your pension scheme operates its tax relief, and you may need to use Self-Assessment to get the full benefit of the tax relief owed to you.
The tax benefits don’t end there. Money inside a pension can grow free of Capital Gains Tax (CGT) and 25% of your money is available tax-free (up to a maximum of £268,275) * once you reach the minimum pension age, currently 55 (due to change to 57 from 2028).

Pension tax relief is subject to some limits. Find out more about how pension tax relief works. Tax treatment depends on individual circumstances and all tax and pension rules may change in the future.

Beating the 60% tax trap

You’re probably familiar with the different rates at which Income Tax is paid. Basic rate tax applies at 20%, higher rate at 40% and additional rate at 45% for the highest earners. Slightly different rates apply in Scotland. But you may also have heard of an unofficial ‘60%’ tax rate that applies in some circumstances. This can occur on earnings between £100,000 and £125,140 within a financial year.

On the face of it, this money attracts a 40% rate of tax - the additional rate of 45% applies on earnings above £125,140. But these earnings can face a higher tax penalty because earnings above £100,000 trigger a reduction in the Personal Allowance for Income Tax.

The Personal Allowance is the amount you can earn before any Income Tax applies and is currently set at £12,570. According to tax rules, the Personal Allowance begins to reduce at a rate of £1 for every £2 of earnings above £100,000. By the time earnings have hit £125,140 the Personal Allowance has tapered away to nothing.

To see how this works in practice, imagine someone with a salary of exactly £100,000. If receive earnings of £10,000 on top of that - perhaps through extra salary or a bonus - this money would face Income Tax at 40%, leaving them with £6,000. But the extra earnings would also reduce their Personal Allowance by £5,000 meaning 40% tax would apply on that amount, equalling another £2,000 of tax.

That would leave them with just £4,000 from the extra £10,000 they have earned - an effective tax rate of 60%.

One way to combat this is to pay into a pension via ‘Salary Sacrifice’. Your employer will usually make regular payments into your pot on your behalf. Depending on your plan rules, you may also have to contribute some money from your salary each month, or you may have the option to do so. This will either taken from your salary before it is taxed, or we will claim 20% tax relief for you. If you're unsure what level of contributions you or your employer pays, you log in to PlanViewer. Go to ‘Plan information’ and select ‘Forms and documents’ and download the Contribution information document. You can also check with your HR department. By bringing earnings back below £100,000, the 60% tax trap is avoided. Thanks to tax relief, making an £8,000 contribution to a personal pension would result in £10,000 being contributed to retirement savings while bringing your adjusted income back to £100,000. Higher rate taxpayers could also reclaim more tax relief via self-assessment, equal in value to another £2,000.

‘Carry forward’ to accelerate your retirement savings

The annual allowance for pension contributions now stands at £60,000 a year. This is the total - from you and your employer – that can be paid into pensions during the year with tax relief applied. Contributions are also limited to your earnings in any particular tax year.

That normally places a ceiling on what can be paid into pensions, but there is a way for individuals to make larger contributions under some circumstances. Carry forward allows you to make use of any annual allowance that you did not use during the three years immediately before the current tax year.

To work out how much extra you might be able to contribute, establish the annual allowance for each of the three-preceding tax-years and subtract any pension contributions made - including from an employer. Any unused allowance might be free to use for carry forward.

Bear in mind that the amount you pay in cannot, however, exceed your annual earnings and high earners may be affected by the ‘ Tapered Annual Allowance’ which reduces what can be paid in with tax relief if earnings are above certain thresholds. Furthermore, if you have previously withdrawn taxable income from your pension you may be affected by another limit - the money purchase annual allowance (MPAA) - which limits contributions with tax relief to £10,000 a year.

Get help if you need it

Whether these options would work for you depends entirely on your wider financial circumstances. There can be downsides to sacrificing salary if it lowers your earnings for other purposes, such as being assessed for a mortgage. Professional financial advice can help you decide it it’s right for you.

*Workplace pensions: What you, your employer and the government pay - GOV.UK (


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