Make sure you max out your pension contributions this year

If you're saving for retirement, make sure that you have used up all their allowances before the tax year ends, and contributed as much to your pension as you can.

With the end of the tax year on 5 April fast approaching, have you made maximum use of your private-pension contribution allowance? Given the generous tax reliefs available, it makes sense for most people to save as much as they can afford.

Contributions to private pensions attract tax relief at your highest marginal rate of income tax. So, if you’re a basic-rate taxpayer, contributing £1,000 to a pension costs you £800. If you pay the higher rate, the cost of the same contribution falls to £600; this falls to £550 if you’re an additional-rate payer.

Remember the pensions annual limit 

However, the amount you may contribute each tax year is limited by your annual allowance. If you exceed this threshold you will have to pay a tax charge. For most people, the annual allowance is worth £40,000 or 100% of their annual earnings, whichever is the lower of these two figures. However, even very low and non-earners get an annual allowance, worth £3,600 a year.

This allowance covers everything going into your pension, including any contributions from an employer and the value of the tax relief you receive. If you’re earning £40,000 a year and contributing 4% of your salary, you’ll be paying in £1,600 of your own money and then receiving a further £400 in tax relief. If you’re also getting a 5% contribution from your employer, this will be worth another £2,000. Altogether, you will have used up £4,000 of your £40,000 annual allowance.

This is how you calculate your annual allowance usage for all defined-contribution pension schemes, whether they are at work or individual arrangements such as a personal or stakeholder pensions. More complex rules apply to defined-benefit plans such as final-salary pension schemes, but if you’re a member of one of these, your employer should be able to tell you how much of your allowance you have used up over the year. Remember that the annual allowance applies across all your pension plans if you have more than one. So, if you’re contributing to a plan at work but are also paying into a plan of your own independently, you need to add up the total value of all your contributions.

Also note that special rules apply to those with high earnings. Once your income goes above £240,000, your annual allowance begins to taper downwards, by £1 for each £2 of income you earn above this limit. So someone with earnings of £270,000 sees their annual allowance decline to £25,000. The tapering continues until your earnings hit £312,000, by which time your annual allowance is just £4,000.

In practice, most people don’t get anywhere near using their annual allowance each year, but if you do have a potential problem – or you’re determined to wring every last bit of value from your allowance – the carry-forward rules may help. 

These let you carry forward any unused allowance left over from the last three tax years to add to this year’s allowance. The only caveat is that you still can’t contribute more than you earn over the course of the year. You must also have been a member of a private pension scheme in the year from which you are carrying forward any unused allowance.

Look to Isas and VCTs too

Another option for savers at risk of breaching the annual allowance is to look at alternative homes for long-term cash. Individual savings accounts (Isas) and venture-capital trusts (VCTs) are popular options since they offer tax incentives of their own, but even savings and investments with no tax breaks attached can be worth considering.

Finally, note that once you begin withdrawing money from your pension schemes later in life, you are still allowed to continue making contributions to top it up. But in these cases, a special “money purchase annual allowance” of just £4,000 a year usually applies.

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