PensionBee, a leading online pension provider, has compiled a checklist for people who are keen to make the most of their pension tax breaks and savings before the end of this tax year and to plan ahead to make the most of their pension before the next tax year begins on 6 April 2023.
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “The end of the tax year is dubbed ‘ISA season’ for investors, because with ISAs, if you don’t use your allowance in that year, you lose it.
With pension allowances, it is not quite ‘use it or lose it’ at the end of the tax year. That’s because with pensions, although there is an annual allowance, you can also use unused allowance from the previous three tax years. This means that unless you have been able to use up your annual allowance for those years, you could have a bit extra on top of your current annual allowance to make tax-free pension contributions, by taking advantage of these rules.
So the end of the tax year is an opportunity to review your pension contributions and to make sure you are making the most of tax breaks on pensions, too. The Government has given pension savers further motivation to check the tax position of their pension by radically changing pension allowances in the Budget.
Now that the lifetime allowance is set to be abolished (and depending on the next Government’s plans), the only allowance most pension savers need to be aware of is the annual allowance. This remains at £40,000 for the 2022/23 tax year but will rise from 6 April for the 2023/24 tax year, to £60,000. If you put more than this amount into your pension in a year, you could face a tax charge. Meanwhile the maximum you can put into a pension in a tax year and still get tax relief is the amount you earned in total in that year.
The carry forward rules can be particularly handy if, for example, you have received a sum from an inheritance that you would like to put in a pension, or if you have sold a property and want to invest the proceeds tax efficiently, or if you are self-employed and had a particularly good year with a bit more than usual to set aside. However, even using carry forward, the amount of tax-relievable pension savings you can make in a tax year could only go up to your earnings in the year you make the contribution.
Being motivated to make the most of your pension allowances can give your retirement fund a massive boost particularly if you are in the years leading up to retirement, from your early fifties onwards. That’s because it’s not long to wait until you can access that money again and if you use your pension rather than savings or ISAs to store it, you benefit from that valuable tax relief.”
End of tax year pension checklist:
Could you increase your contributions for the year ahead? If you are a basic rate taxpayer and pay in £100 a month (£1,200 a year), you get £300 a year in basic rate tax relief. If you increase your contribution to £120 a month, you’d get £360 a year in tax relief. Try the PensionBee tax relief calculator to see how much of a tax boost your money could get from HMRC.
Have you claimed all of the tax relief you are owed? If you are a higher or additional rate taxpayer and in what’s known as a ‘relief at source’ scheme, you get basic rate tax relief automatically via your pension scheme, but have to claim higher or additional rate relief through a Self Assessment tax return. See table 1 below for the amounts that higher and additional rate taxpayers have been claiming over the past five years. Previous PensionBee analysis has revealed that higher and additional rate taxpayers have left £1.3 billion in tax relief unclaimed since 2016/17. If you are a higher or additional rate taxpayer but in a net pay or salary sacrifice scheme, your relief will be added for you by your employer. So it is important to know what kind of tax relief system your pension scheme operates.
Are you in a salary sacrifice pension arrangement through work? Increasing your pension contributions can be a way to beat any income tax increase you might face through receiving a pay rise. For instance, if your pay goes over £50,270, making you a higher rate taxpayer, you could divert the extra income to your pension and would then not face the extra higher rate tax on your earnings.
Be aware of pension allowances. These are changing after the Government announced the abolition of the lifetime allowance and also an increase to the annual allowance from £40,000 to £60,000 in the last tax year.
The lifetime allowance still applies for the 2022/23 tax year. The charge will be abolished from 6 April but pension pot values will still be tested against the lifetime allowance for the tax year 2023/24 before the allowance is completely scrapped.
The amount of pension contribution that can receive tax relief depends on what you earned in that tax year. So if you earned £30,000 in a year, that’s also the most you could pay into your pension and still get tax relief. You can technically pay more into your pension, but you wouldn’t get the tax relief and if you went over the annual allowance, you might face a tax charge.
If you have a large lump sum you would like to add to your pension, perhaps from an inheritance or house sale, you might look to use the carry forward rules, which allow you to use unused annual allowance from the previous three tax years. Do you have enough annual allowance and unused annual allowance from the previous three tax years, as well as high enough earnings in the current tax year, to add this to your pension? You can use the Government calculator here. Remember that all contributions, including tax relief added and employer contributions, count towards your annual allowance.
If you are a high earner, remember the annual allowance is tapered away once you earn more than £240,000, although this threshold is rising to £260,000 on 6 April. You’ll need to do some sums to work out if this applies to you and there is guidance on what to do here.
Have you weighed up whether ISA or pension contributions are best for your financial goals? Remember that you pay into an ISA after you’ve already paid tax but then you can withdraw from one tax-free, whenever you want. With pensions, your contributions are not taxed, but income taken from them is taxable and you have to wait until you are 55 (or 57 from 2028) to access them. A combination of both can mean the best of all worlds if you are trying to make your investments as tax-efficient as possible.
Appendix
Table 1: Total and average amount of higher and additional rate tax relief claimed via Self-Assessment from 2016 to 2021
| Tax year | Total higher and additional rate relief | Average amount claimed by higher and additional rate taxpayers |
|---|---|---|
| 2016-17 | £988m | £3,000 |
| 2017-18 | £815m | £3,000 |
| 2018-19 | Figures not available | Figures not available |
| 2019-20 | £1,287m | £4,500 |
| 2020-21 | £1,800m | £6,500 |
Source: PensionBee, March 2023. 2019-21 data from HMRC FOI request. The same data was not collected in 2018-2019
