Make sure you get full pension relief
A growing number of people are being dragged into the higher-rate tax net, but did you know that you can turn this to your advantage by boosting your pension fund at the same time as reducing your tax bill?
The coalition government has taken many low earners out of the tax regime by increasing the tax-free personal allowance from £6,475 in 2010–11 to £8,105 in 2012–13. It intends to increase this to £10,000 by the end of the current parliament.
As always, there is no free lunch. More and more people are now suffering higher rates of tax, as the government reduced the basic rate income tax threshold from £43,875 in 2010–11 to £42,475 in 2011–12 and froze it at this level for the current 2012–13 tax year.
As a result, many people have found themselves being pushed up into higher rate tax even though their income has not increased. However, there is a simple way to reduce a higher rate tax bill and beat that fine.
You might already be doing it, but not knowing it. Hopefully, you will be making contributions into a personal pension or into your employer’s group personal pension scheme.
The contributions you personally make towards your pension pot are eligible for higher-rate tax relief, although employer contributions do not count for this exercise.
The pension provider will receive basic-rate tax relief of 20% and this will automatically be added to your pension fund. However, to get the higher-rate tax relief that you are entitled to, you will need to take action.
The next step is to write to your pension provider and obtain a statement of your personal contributions for the tax year. Submit this information to your tax office with a claim for higher-rate tax relief or complete the relevant section in your self-assessment tax return.
This has the effect of increasing your basic-rate threshold by however much you have contributed to your pension and taking that figure out of the 40% tax bracket.
You should receive a nice cheque from the taxman. He will make an allowance for future contributions in your tax coding going forward, and this will be received directly into your pay packet.
You can also claim tax relief going back to tax year 2008–09 if you act in this tax year.
What I suggest to my clients is to do their sums once they receive their February payslip, budget what their March pay will be, and make a one-off personal pension contribution in early March. This will allow the pension provider to process it before April 5.
By Keith Mackie
Published in The Press and Journal on