Carl Lamb responds
Tax relief on pension contributions is provided at up to the highest rate of tax you pay, so if you pay income tax at the higher rate of 40 per cent and your gross pension contributions are matched by income taxed at the higher rate, all of your pension contributions will receive tax relief at 40 per cent. This is a huge benefit and a very tax-efficient way of saving, provided you are happy to wait until you are at least at the minimum pension age (currently age 55) before accessing your money.
When making a personal contribution, you will normally get immediate base-rate tax relief on your contribution of 20 per cent. The remaining 20 per cent relief will need to be claimed through your self-assessment tax return, or via an adjustment to your tax code. As a self-employed person, your tax return is the route to claim the additional tax relief. Many higher rate taxpayers forget to claim the additional relief: it’s possible to claim for the four previous tax years.
Planning for retirement is an important part of anyone’s financial strategy: I recommend that you put a tangible plan in place to ensure that you can achieve your retirement goals. An independent financial adviser will be able to help you establish those goals and map a course to achieve them. An adviser can also help ensure that your pension investments have the best chance of delivering the performance levels you need and are suitable for you in terms of risk and any specific preferences you may have.
It’s important to note that there is a limit to the total amount you can contribute to your pension each year tax-efficiently – this is called the Annual Allowance and for most people it is £40,000 (2021/22 tax year). In addition, your own total tax-relievable personal contributions are limited to the level of your earnings. The Annual Allowance is reduced once you start taking flexible benefits from your pension or if you are a particularly high earner.
There’s also an upper limit on the amount you can hold in your pension savings in your lifetime without incurring an additional tax charge, known as the Lifetime Allowance. This currently stands at £1,073,100 and will remain at this level until 2026.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.