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Using a pension to lower your tax bill

How to save money when you're over 60

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Whatever your income level, contributing to a pension is an effective ways to lower your tax bill. As well as costing you less overall, you’re also investing in your retirement, which could provide you with a better standard of living in the future. It’s never too early to start planning for later life and putting money into a pension fund.

Tax relief on your contributions

Everyone is entitled to put up to £50,000 a year into a pension fund and you’ll receive tax relief on anything you contribute. As the money you put into the pension pot isn’t taxed, it’s actually costing you less overall. The amount of tax relief you gain on your pension contributions will depend on how much you earn and your subsequent tax band. For example, basic rate taxpayers pay income tax at 20%. Therefore, for every £100 you contribute to a pension it actually costs you the equivalent of £80. Those paying tax at a higher rate will receive more in tax relief, so a 40% tax payer will gain £40 in tax relief for each £100 they put into a pension.

The new Child Benefit rules

Since the Government introduced new rules on who’s entitled to Child Benefit, some higher earners have had to forgo this income. However, if you earn between £50,000 and £60,000, making pension contributions could enable you to claim back some of this entitlement. You start losing Child Benefit at a rate of 1% for every £100 you earn over £50,000. For families with three children, this amounts to £24.49 for every £100 they go over the threshold. Instead of this, you could put the £100 into a pension, which because of the tax relief will only cost you £60 and could mean you’re entitled to more Child Benefit than you would have been.using a pension to lower your tax bill

Top earners

Those who earn over £100,000 start losing their entitlement to the personal allowance. This is the amount you can earn before tax starts being deducted: currently £8,105 a year. For every £2 you earn over £100,000, you lose £1 of your allowance. This could increase your tax rate to 60% when combined with an income tax level of 40%. For those whose income ranges between £100,000 and £116,210, making investments into your pension could cost you less than the reduction in your personal allowance. A £100 contribution to a pension fund would effectively cost you £40 and the reduction in taxable income could allow you to keep more of your personal allowance.

Depending on your income level and tax rate, putting money into a pension pot could be worth more to you than if you were to simply keep it as take home pay. However, how much you can actually save will be based on the amount of income tax you pay.

See advice

The best way of reducing your tax liabilities is to speak with a financial adviser or accountant. They’ll be best placed to offer advice on how you can limit the amount of tax you pay by fully utilising your allowances. They can also provide guidance on the best investments to make, as you need to choose your pension fund wisely in order to benefit most from reducing your tax bill. A poorly planned pension could end up costing you more in the end.



About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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