Understanding of pension tax relief questioned

Understanding of pension tax relief questioned

27 June 2011 / by Paul Dicken

Pension provider Alliance Trust Savings is asking whether people are making the most of pension tax relief.

After the government quashed rumours that it was going to abolish tax relief for higher earners, the firm has highlighted research undertaken earlier this year which showed higher rate tax payers in the UK were losing out on £795m in pension tax relief.

The research, carried out by the professional advice website unbiased.co.uk, said by not making additional voluntary contributions to occupational pension schemes higher earners were missing out on an extra £1,650 in tax relief a year.

Understanding tax relief

Alliance Trust said the tax relief available on contributions makes pensions one of the most tax efficient savings vehicles. Earning relief from the tax normally paid on earnings at the ‘marginal rate’ means high earners who pay income tax at 50 per cent could make a £50,000 contribution in one tax year at a net cost to them of £25,000.

This calculation is based on the tax rules during the tax year 2011/12.

Basic rate tax payers in an occupational scheme will normally have the tax relief automatically added to their pension contributions, while 40 and 50 per cent tax payers usually claim tax relief via self assessment.

High earners

Alliance Trust are urging any 50 per cent tax payers without a pension plan to consider opening one and making contributions to take advantage of the tax relief available at 50 per cent. The government has said it views the 50 per cent marginal tax rate for the highest earners as temporary.

Maximising contributions

Head of pensions at Alliance Trust Savings, Steve Latto, said: “Tax relief available on pension contributions means that all individuals should consider maximising pension contributions whether they are a basic rate taxpayer or whether they are a 50% rate taxpayer.

“Higher rate taxpayers need to remember to complete their self assessment annually to ensure their pension contributions are as tax efficient as possible. Individuals who are unsure what to do should always seek professional advice.”

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