Make the most of Pension Tax Relief
The tax details shown here are accurate from 6 April 2012 for the 2012/2013 tax year, and are subject to change.
From the 6 April 2011 the maximum amount that can be saved into a pension tax-free is £50,000.
The effect of this is that 20 per cent of what a basic rate taxpayer pays into his or her pension is constituted from tax that would normally be paid on that money.
So in a year, if a total of £10,000 is paid into a pension £2,000 is paid by the government so the net payment from your take-home earnings is £8,000.
With the ability to invest up to £50,000 a year before tax pension investments, like SIPPs, are an attractive way to limit the impact of tax on your earnings.
If a higher rate taxpayer (40% tax rate) makes a net payment (before tax is taken on their income) of £16,000, HMRC contributes £4,000 automatically, and a further £4,000 can be claimed back via a tax return.
This means the cost of making a £20,000 pension contribution is just £12,000.
Up to 25% of your pension can be taken as a lump sum tax free, within the lifetime allowance
Income tax is charged on pension income such as annuities or income drawdown, including state pension
You do not pay any national insurance contributions when you are retired
The personal allowance – earnings allowed before tax is charged – is: £10,500 for 65–74 year olds and £10,660 for people aged 75 and over (2012-13)
If annual income in retirement exceeds £25,400, the personal allowance is reduced by £1 for every £2 extra earned, e.g. by half the amount of extra income. The personal allowance in retirement will not fall below the standard personal allowance, unless your income exceeds £100,000
The tax details shown in this guide are accurate from 6 April 2012 for the 2012/2013 tax year, and are subject to change.
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