How your pension can cut your tax bill

Labour and the Conservatives may have reassured voters they won't increase Income Tax in the coming years, but tax bills continue to rise. The main culprit is the freeze on personal tax thresholds until 2028, put in place by the Conservatives and likely to continue under Labour. That means more people are drawn into higher tax thresholds over time.

The Office of Budget Responsibility estimate that between 2022/23 and 2028/29, the number of people paying 40% tax will increase by three million, while 400,000 more will pay 45% tax on some of their income. Against this backdrop, it makes sense to look at ways to reduce your tax liability - and that's where pensions can be your friend!

Personal pension contributions

Charlene Young, Pensions and Savings Expert at AJ Bell, says personal pension contributions are a straightforward option to reduce your tax bills. She says: “If you’re under 75 and pay into a personal pension like a SIPP, you’ll receive basic rate relief automatically. This tax relief is a 25% top-up to pension contributions – so a £2,000 personal contribution would automatically be boosted by £500 to £2,500 in the pension.”

Higher and additional rate taxpayers can claim more relief direct from HMRC. This isn’t automatic though, and needs to be claimed via your tax return.

Jason Hollands, Managing Director at Bestinvest, adds: “These reliefs are incredibly attractive for those subject to the higher rates of tax, but it should not be taken for granted that they will always be available! Over many years, politicians from all the major parties have mulled changing the system, and it is possible that a future government might reduce pension tax reliefs.” It’s worth taking advantage while you can.

Salary sacrifice