Despite all the hoo-ha about Jimmy Carr this week there is really nothing wrong with making your pension contributions tax efficient even non-earners can receive basic rate tax relief on contributions up to £3,600, meaning a contribution of £3,600 would cost them £2,880.
As IFA’s at Enable it is our job to maximise tax relief achievable on a pension contribution. If you are in the 50%, tax bracket theoretically you could make a gross contribution of £50,000 at a net effective cost of £25,000 but from 2013-14, the additional rate of tax will fall to 45% from 50% meaning a £50,000 contribution will cost a higher earner £27,500.
Although the highest rate of income tax is currently 50%, some can actually achieve tax relief at a net effective rate of 60%. The personal allowance is reduced by £1 for every £2 of taxable income above £100,000. Using the current year's personal allowance of £8,105 this means that an individual's personal allowance is completely eroded once taxable income reaches £116,210. By making a pension contribution, however, an individual can reduce their taxable income and, as a result, reclaim their valuable personal allowance. This is particularly useful to those with a taxable income between £100,000 and £116,210 as they could reclaim their full personal allowance by making a pension contribution. As well as getting 40% tax relief on their pension contribution, by reclaiming their personal allowance their effective rate of tax relief is up to 60%.
Enable’s IFA’s can help you make the most of your tax bracket.
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