The Government gives a bonus as a reward for your savings in the form of tax relief. When you save into a pension and earn tax relief, some of your money from the tax you paid on your earnings goes into your pension pot. Tax relief is paid based on the contribution you pay to the Government from your income. The basic rate taxpayers get 20% pension tax relief, higher rate taxpayers can get 40%, and additional rate taxpayers can get 45% pension tax relief.
So, if you want to earn the best pension plan, you need to know how pension tax relief works. If you are the basic rate taxpayer and contribute $100 from your salary into your pension, the Government will add $20 to your pension pot as tax relief. While high rate or additional rate, taxpayers only need to pay $60 or $55 to achieve the same $100 of pension savings. The Government recently applied new changes through which the Government may reduce the higher and additional rate tax relief on pension contributions. Instead of this, they will use a flat rate of relief for all pension savers regardless of their earnings.
The Government has set limits on the amount of pension contribution through which you earn tax relief. This limit is also known as the annual pensions allowance. Any pension payments you make over the set limits will be counted to the income tax at the highest rate you pay. However, you can carry the unused allowances from the past three years if you are a pension scheme member during those previous years.
Unemployed spouses and children are none taxpayers, but they are eligible for tax relief of 20% even though they don't pay tax. You can easily save 100% of your income into a pension to earn tax relief as long as you didn't exceed the set limits of pension contribution.
Covid-19 brings a lot of changes in every sector of the country. Pensions tax relief costs huge i.e., billions of pounds a year because it effectively tops up pension contributions for millions of people. Due to the pandemic of Corona Virus, the Government is reviewing the tax system. The flat rate of pension tax relief between basic and higher rate taxpayers could offer a reasonable cost saving for the treasury, but it depends on the set rate level. Many people will feel fairer with these changes because it supports them, mostly to none-taxpayers and essential rate pension savers. However, higher rate taxpayers will never be happy with these changes.
These alterations are not so simple; there is a range of complex aspects that will need deep thought to deliver on desired outcomes without damaging people's saving behaviours. It means that the Government needs to set the flat rate reasonably so that pension savings remain attractive. Not only this, but the Government also needs to educate people about the benefits of flat-rate tax relief because it's a complicated task to change the mind of people towards the can't rate tax relief system.
There are also many complexities with the pension tax relief system, and one of the main issues is that many of the lowest earners who are not paying income tax in certain workplace pension schemes are not receiving 20% tax relief on contributions. This is due to their pension schemes' terms and conditions, so they don't receive any Government tops ups. The Government has now taken action about this matter, and hopefully, the Government will secure the tax relief system for nontaxpayers in net pay schemes.
The Government needs to implement these changes as soon as possible so that no one misses out on the top-ups to the pension contributions they are authorized to. These changes will let even more savers contribute to the pension scheme to earn tax relief. Tax relief is the most important aspect of pension contributions and is known as the main benefit of pension savings. Tax relief plays a vital role in both incentivizing and rewarding locking money for the future. So, any changes the Government is thinking to make in tax relief to cut costs must be taken into account in the longer term that encourages people to save for their future life and avoid an ageing population depending on the state.
How to claim pension tax relief?
The type of pension you are saving into will conclude the way of tax relief you can claim. You need to check your scheme to see what method it uses because you may need to do extra work by yourself to get full tax relief. There are two ways through which you can claim tax relief.
Pension tax relief from "net pay" is generally used by workplace pension and doesn't require any extra work to get full tax relief. In this way, your pension contributions will be deducted from your salary before the income tax is paid on them and your pension scheme will automatically claim full tax relief on it at your highest rate of income tax.
Pension tax "relief at source" applies to all personal pensions and some workplace pensions, so if you have private assistance with an insurance company, you can use this method. This method requires some extra legwork to do. If you contribute through your employer into a pension, than your employer will take 80% of your pension contribution from your salary. Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension. In this method, higher and other rate taxpayers need to complete some assessment to receive extra comfort.
Vatsala is a passionate writer and SEO executive at Chetaru-International Digital Agency. Beyond search engines, she is best at expressing her thoughts and informative stuff in articles. She is always keen to learn and apply new things in her professional and personal life.BLOG COMMENTS POWERED BY DISQUS