When your clients eventually come to retire, they may draw a significant portion of their income from their pensions.
Yet, if they don’t contribute enough to their savings during their working life, they could face a shortfall later. In March 2024, IFA Magazine reported that 44% of people in the north-east are concerned about running out of money in retirement.
Fortunately, if your clients understand some key rules about pension contributions and tax, they could significantly increase the size of their pot.
Read on to learn three pension tax rules your clients could use to boost their retirement savings.
1. The Annual Allowance
One of the key benefits of paying into a pension is that, as well as their own and employer contributions, your clients receive 20% tax relief at source. This means that a £100 increase to the value of their pot effectively “costs” them £80, with the extra £20 added by the government.
Higher- and additional-rate taxpayers may also be able to claim extra tax relief on their contributions (more on this later).
The amount of tax relief your clients can benefit from is limited by their “Annual Allowance”. This is the maximum amount your client can contribute to their pension in a single tax year without facing an additional tax charge. In 2024/25, it stands at £60,000 or 100% of their earnings, whichever is lower.
Your client’s Annual Allowance could also be lower if their income exceeds certain thresholds, or they have already flexibly accessed their pension.
If they haven’t already, your clients may want to use as much of their Annual Allowance as possible each year, so they can maximise the tax relief they receive. This could give a valuable boost to their retirement pot.
Additionally, they may be able to carry forward any unused allowance from the previous three years, provided they have already used their Annual Allowance for the current tax year. This could mean they’re able to benefit from even more tax relief.
That said, the rules around carry forward can be complex, so they may want to seek professional advice first.
2. Tax relief for higher- and additional-rate taxpayers
Using as much of their Annual Allowance as possible each year could help your clients maximise their tax relief. If they’re a higher- or additional-rate taxpayer, they might be able to claim even more.
This is because your clients are entitled to tax relief at their marginal rate of Income Tax. This is:
- 20% for a basic-rate taxpayer
- 40% for a higher-rate taxpayer
- 45% for an additional-rate taxpayer.
Clients that fall into higher- or additional-rate tax brackets only receive 20% tax relief on their contributions automatically. Fortunately, they can claim the additional 20% or 25% through self-assessment.
If your clients are unaware of this, they could be missing out on a significant amount of wealth in their pensions. It’s important that they start filing a tax return each year to ensure they receive as much tax relief as possible moving forward. They may also be able to apply for unclaimed tax relief from the past four financial years.
This could significantly increase the size of their pension pot without paying in more of their own wealth.
3. Salary sacrifice
If your clients want to boost their retirement savings, they might consider increasing their monthly pension contributions. However, this could mean that they reduce their take-home pay, making it more difficult to meet their financial obligations or pay into other savings and investments.
Yet, if they take advantage of “salary sacrifice” they may be able to pay more into their pension without affecting their monthly earnings.
Some employers offer a salary sacrifice scheme, which allows clients to give up a percentage of their earnings in exchange for benefits including a company car, healthcare cover, or pension contributions.
Normally, employers take a client’s gross salary and deduct Income Tax, National Insurance contributions (NICs), and pension contributions to arrive at an employee’s net monthly pay.
In comparison, if your clients choose salary sacrifice, they can give up a percentage of their gross salary, which is paid directly into their pension. Income Tax and NICs are then calculated based on the lower salary.
This could mean that they’ll pay less tax and their take-home pay will increase. Or, if they choose, they could increase the amount that they pay into their pension, while their monthly income remains the same.
Employers could also pay less in NICs by using salary sacrifice, so many businesses will be willing to offer a scheme of this kind.
It’s important for your clients to bear in mind that, while their income may not change, their annual salary is technically lower when they use salary sacrifice. This could affect their ability to borrow and their entitlement to certain benefits in the future. That’s why it’s important for them to seek professional advice before choosing salary sacrifice.
Get in touch
We can help your clients explore ways to increase the size of their retirement pot.
They can contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
