The 45% U-turn and making the most of your allowances

Pension tax relief – the rules

As most people are aware, if you make a pension contribution, you receive tax relief at your highest marginal tax rate. This means that basic rate taxpayers receive 20% relief (19% from 6 April 2023) and additional rate taxpayers (those with earnings over £150,000) receive 45%. 

There are, however, limits to the amount you can contribute, and the amount of relief you can receive each year. The annual allowance is currently set at £40,000, and this allowance tapers down for those with earnings over £240,000, with the minimum allowance being £4,000.

If you don’t use your full allowance for any given year, you are able to go back and sweep up unused amounts for the previous three tax years. This is calculated by using up the current years’ allowance first, then going back to use the earliest available year to sweep up unused allowances.

The opportunity

If you’re an additional rate taxpayer this year and you haven’t maximised your pension contributions for any of this or the previous three tax years, you have the chance to receive 45% relief on contributions. While you will still receive 45% relief after April 2023, if you haven’t fully used the allowance this year and for the 2019/20 tax year, the unused amount for the 2019/20 tax year will be lost. However, it is important to determine how much allowances you have in each tax year and your overall financial position as the pension rules have changed several times in recent years.

The cutting of the basic rate band does mean that for basic rate taxpayers it would be beneficial to bring forward any planned contributions to before April 2023 so they receive 20% rather than 19% relief.

So, if you are in the position to contribute to a pension, please get in touch, as we can help you ensure you get the contribution right.

Get in touch

If you would like to speak to one of our Financial Planning specialists, please contact Ben Waters or Doug Rodman in Buzzacott’s Financial Planning team. Alternatively, fill out the form below and we will be in touch shortly.