Tax and My Pension – 5 Top Tips

Many of us save for retirement in different ways with the aim of creating wealth to see us through a long and happy retirement. Pensions often remain the cornerstone of retirement provision and taking advantage of tax relief can be extremely rewarding.

5 things you need to consider when it comes to your tax and pension for retirement

1. Take advantage of incentives and tax relief

Pensions are unique as the government incentivise us to contribute to them in the form of tax relief. When you pay into your pension the government top it up too.

Let’s say that you want to put £100 into your pension. When you earned that £100 – assuming you are a basic-rate taxpayer – you must hand over £20 of it in income tax. So, in order to put that £100 into your pension, you are only required to pay in £80, as the government will add the £20 it took in income tax to your pension.

If you are a higher-rate taxpayer, you will get tax relief at 40% (note income tax rates are different in Scotland). However, it is most likely that you will only get basic rate tax relief at source and will need to claim the additional tax relief via your self-assessment tax return.

Tax relief doesn’t just help long-term retirement savings, it can also be a real bonus for anyone approaching retirement age who wants to do some late tax-efficient savings for retirement.

2. Know your limits – the Annual Allowance

As mentioned previously, the taxman encourages pension savings by giving tax relief as an incentive. Tax relief is restricted to the higher of £3,600 or 100% of your earnings to a maximum of £40,000.

The contributions you make – and your employer, if relevant - in a tax year count towards the annual allowance for that tax year. The annual allowance for this tax year is £40,000, which means you could contribute £40,000 before a tax charge may apply.

If, however, you have taxable income for a tax year greater than £240,000, your annual allowance for that tax year will be restricted. This means that for every £2 of income you have over £240,000, your annual allowance is reduced by £1.

The maximum reduction will be £36,000, so if you have income of £312,000 or more, your annual allowance will be £4,000. We recommend you speak to a financial adviser for more information if you are potentially impacted by this legislation.

For expert advice on financial matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.

3. Money Purchase Annual Allowance poses restrictions for accessing retirement savings

If you have already taken some of your retirement savings, your future pension contribution limit may be restricted to the money purchase annual allowance (MPAA).

Depending on how you access your pension, the MPAA results in contributions being limited to £4,000 a year and this is inclusive of any employer contributions.

If you have, or intend to, access your retirement savings flexibly, be sure to consider the implications on future contributions to ensure you do not exceed the limit. You may be a member of your employer’s workplace pension scheme and the combined value of the employee and employer contributions could result in the MPAA being breached and a tax charge created.

4. Pension Lifetime Allowance also has limits

In addition to a limit on how much you can contribute into your pension, there is also a limit on the amount you can build up in pensions when you start taking retirement savings. The limit is known as the lifetime allowance and applies to the total value of all pensions you may have accumulated.

The lifetime allowance is £1,073,100 and has recently been frozen at this level until April 2026 by the Chancellor of the Exchequer. This increases the risk of individuals being impacted simply due to the combined impact of contributions and positive investment returns and may increase the need for pension plans and funding levels to be reviewed more regularly.

5. Take advantage of tax-free cash

In addition to the tax relief previously outlined, the ability to withdraw a tax-free lump sum is one of the main attractions of funding a pension. Rules allow for pension funds to be fully withdrawn as a lump sum, but this is often not beneficial due to the implications of tax.

Current rules allow up to 25% of the value of the pension to be taken as a lump sum, free of tax. Once withdrawn, you can ultimately decide what to do with the capital value from investing it through to spending as you so wish. Considering when to access your tax-free cash is an important consideration together with how you will use the capital.

Written by Craig Pritchard Dip PFS, Senior Corporate IFA Consultant, Integrity365

Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.