How Pensions Reduce Your Tax Bill

While many people spend time focusing on expenses and investments as a way to reduce tax liabilities, a key factor to consider is a pension. Whether you are seeking a way to manage finances more efficiently as a self-employed professional or are a PAYE employee looking to gain a better understanding of tax obligations, this blog is sure to help.

In the UK, almost 32% of adults admit to not knowing how much they have saved in their pensions. This is just one of many statistics that demonstrate the differences in understanding that people have around their retirement funds. At Hysons, we believe that knowledge is key as there is no time like the present to plan for the future. 

When managed properly, pension payments can also help you now as investments can be used to reduce tax bills. 

Reduction in Taxable Income for High Earners

The first way pensions can reduce your tax bill is when you fall into one of the higher earner tax bands. This is possible as the UK government provides tax relief based on your income band.

Basic-rate tax payments (up to £50,270) automatically receive a 20% relief. While this is still a helpful benefit for many, more savings can be experienced for those who earn above this amount. For higher-rate taxpayers (up to £125,140) an additional 20% relief can be claimed via a self assessment tax return and for additional-rate taxpayers (over £125,140), an extra 25% can be claimed back. This means for higher and additional-rate taxpayers, as well as the 20% basic relief, additional funds can also be claimed back to offset tax payments for the year.

Tax-Free Withdrawals

Another way to reduce your tax bill relating to pension payments is to withdraw 25% of your overall pension when you reach the age of 55. This portion is tax-free unlike the other 75% of funds which are subject to income tax upon withdrawal. 

Even if you are still working at this age, withdrawing a lump sum at this stage may reduce your overall tax liability. By managing this process with your accountant, you can invest these funds to still grow interest so that you have even more money available when you choose to retire.

It should also be noted that as of 2028, the minimum age for accessing pensions will rise to the age of 57.

Use for Tax Planning

Personal pension contributions can also be used for tax planning if you are set to be liable for a higher tax bill than expected. By paying into a pension, before the end of the tax year, you can essentially stop yourself from jumping into a higher tax band. This contribution can be paid at any time, meaning you can invest a larger amount of cash into your pension just before the end of a tax year once you have a better idea of your upcoming liabilities.

How Can Hysons Help Manage Personal Pensions?

Are you looking for support in managing your pension contributions? If so, our team is ready to help you manage tax payments efficiently.

Our personal accounting services are ideal for helping you remain in complete control of your finances. Get in touch today to learn more.