Maximise Pension Contributions Before Income Tax Relief Cuts
Published / Last Updated on 26/09/2022
You may or may not know that when you make personal contributions to pensions, you get tax relief up to your highest rate of income tax.
For example:
If you earn £160,000. You are paying 20% income tax, then 40% income tax and 45% income tax on income above £150,000. £10,000 is taxable at 45%. If you make a gross pension contribution of £10,000 you will get 45% income tax relief on the £10,000 paid i.e., tax relief of £4,500 meaning you have paid just £5,500 to have £10,000 extra in your pension fund.
For the same person above, if they pay £15,000 gross into a pension, they will get 45% tax relief on the excess income over £150,000 i.e., that which has paid 45% income tax and the other £5,000 gross pension of the £15,000 total will get 40% income tax relief.
- Basic Rate Income Tax is being reduced from 20% to 19% on 6th April 2023.
- Higher Rate Income Tax is unchanged at 40%.
- Additional Rate Income Tax at 45% is being abolished from 6th April 2023.
Therefore, you need to consider making pension contributions in the current tax year to attract higher rates of income tax relief as they reduce next year.
