Boost Your Income Tax Savings with Pension Contributions

Did you know that pension contributions can help you save more than just for retirement? For self-employed business partners, pensions offer a powerful way to reduce income tax, avoid specific charges, and protect tax-free allowances.

How Pension Contributions Save on Taxes

For every £1 (net) contributed to a pension, the government adds 25%, effectively putting £1.25 (gross) in your pension. This gross amount extends the basic and higher rate tax bands, reducing the overall income tax and National Insurance (NI) tax liability.

For example, if a Scottish taxpayer earning £90,000 contributes £5,000 to a pension, their tax liability drops by £1,750, meaning £6,250 goes into their pension at a net cost of just £3,250 to them (£5,000 less £1,750).

Key Benefits for High Earners

1. Higher and Additional Rate Relief: Contributing to a pension can help reduce taxable income for those paying high rates, offering immediate tax relief as tax bands are extended.

2. High Income Child Benefit Charge (HICBC): For those earning over £60,000, pension contributions can help mitigate the HICBC charge by reducing the income tax liability, which preserves the child benefit payments.

3. Personal Allowance Preservation: Those with earnings above £100,000 gradually lose the tax free Personal Allowance entitlement. This allowance decreases by £1 for every £2 and is lost in its entirety once income reaches £125,140. Contributions can lower taxable income and restore this allowance, leading to significant savings.

4. Salary Sacrifice: Salaried partners can opt for salary sacrifice, redirecting part of their salary into a pension to reduce taxable income and save on National Insurance.

Maximising Tax Savings

– Optimise the Annual Allowance: Contribute up to £60,000 per year without triggering an allowance charge. For those with income in excess of £260,000, advice should be sought due to the tapering rules.

– Use Carry Forward: If you haven’t fully used your allowance in the past three years, you can make catch-up contributions, which is ideal for those with fluctuating incomes.

Next Steps

We would recommend you annually review your income levels and discuss your position with your tax advisor and / or financial advisor. By planning around the level of pension contributions you can make, helps you both save for the future and can give you instant income tax relief.

Contact our team

Louise Mackie

Manager

As head of our Professional Practice sector group, I have experience in assisting our professional firms with their specific tax needs and providing a tailored service to suit the needs of each client. This includes…

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Jonathan McDowall

Director

I’ve been providing financial advice since 2006 working with individuals and businesses, to help them achieve their financial aims. My advice centres around planning to meet clients’ financial and personal goals, considering where they are…

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