The economic outlook for 2023 is “very challenging” according to the Bank of England’s (BoE) most recent Monetary Policy Report.
With the UK in recession and allowance changes from the autumn statement due to come into force in April, purse strings will be tighter for millions of households this year.
With inflation likely to remain high and the war in Ukraine continuing, staying focused on your long-term plans will be key.
That means staying calm, avoiding emotional reactions, and above all, continuing to prioritise your future financial security. One of the best ways to do this is through your pension and the tax efficiencies it offers.
Here are five key principles of pension tax relief to help you make the most of your pension in 2023.
1. Tax relief is paid automatically at the basic rate
Tax relief is effectively an incentive to save into a pension. It is a bonus, added by the government, to the pension contributions you make.
The “bonus” is paid automatically at the basic rate of tax (20%). This means that as a basic-rate taxpayer, topping up your pension pot by £100 costs you just £80. The 20% you pay on your income is paid by the government when you put that money toward your retirement.
You receive tax relief on the contributions you make, up to a certain limit (see point three).
2. You might be able to claim additional pension relief
As a higher- or additional-rate taxpayer, you can claim further pension relief based on the rate of Income Tax you pay.
This means that as a higher-rate taxpayer, you can claim an additional 20% (taking you to 40% in total). An additional-rate taxpayer can claim an extra 25% (for a total relief of 45%).
The cost of a £100 contribution is just £60 for a higher-rate taxpayer and only £55 for someone on the additional rate. This could prove especially important from April 2023 when the additional-rate threshold drops from £150,000 to £125,140.
While basic-rate relief is applied automatically, you’ll need to claim additional relief through your self-assessment tax return.
3. Tax relief is payable up to the pension Annual Allowance
Pension tax relief is applied to any contributions you make up to the pension Annual Allowance.
For the 2022/23 tax year, the allowance stands at £40,000 (or 100% of your pensionable earnings, if lower).
You can contribute £40,000 to your pension each year and receive tax relief so it is worth making full use of your allowance if you can afford to.
4. A lower Annual Allowance could apply to you in certain circumstances
Your personal Annual Allowance could decrease if you are a high earner or if you take your defined contribution (DC) benefits in certain “flexible” ways. Understanding if you have triggered either of these allowances is vital.
Tapered Annual Allowance
If you are a high earner, you might be hit by the Tapered Annual Allowance.
While the calculations can be complicated, if your annual income exceeds £240,000 your Annual Allowance is likely to reduce by £1 for every £2 your income exceeds a certain threshold amount (£200,000).
Your allowance could drop as low as £4,000 so if you don’t know which allowance applies to you get in touch now.
Money Purchase Annual Allowance
Your Annual Allowance can also reduce if you take pension funds using some “flexible” options.
Triggering the Money Purchase Annual Allowance (MPAA) reduces your allowance from £40,000 to just £4,000.
This could be hugely significant if you are accessing one pension fund while continuing to contribute to another. Choose your retirement options carefully and be sure to speak to us before you commit.
5. Your pension’s tax efficiencies are crucial for securing your future financial security
Pension tax relief is just one of the ways that your pension is tax-efficient.
At Hartsfield, we can help you to make the most of the pension plans you hold. Factoring your pensions into a long-term financial plan aligned to your dream retirement gives you the best chance of living the lifestyle you want once your career ends.
The help we offer doesn’t end at retirement either. We can help you choose the right option for you and then help you manage your retirement income for the rest of your life.
Get in touch
If you would like to discuss the tax efficiencies of your pension, or any aspect of your long-term financial or retirement plans, please get in touch and find out how our team of expert planners can help.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.