Pensions tip over employment scheme to ‘reduce your tax liability’ | Personal Finance | Finance

Hannah Martin, pensions expert and founder of Rich Retiree, spoke about some key principles to note when arranging your pensions and thinking about your contributions. She said: “The best way to build your private pension is to make the most of the tax benefits of investing in it – and pay in as much as you can afford.

“Then let compound returns do their work until you are ready to retire.” She went on to explain how to build your pensions in a tax-efficient way.

‘Reduce your tax liability’

Ms Martin said: “If you are employed, your employer may match some of your contributions. But even if not, you can use salary sacrifice to reduce your tax liability by paying into your pension.”

Salary sacrifice is where you arrange with your employer for a portion of your pay to go directly into your pension rather than into your pay packet. This means you pay less National Insurance and income tax as your income is lower, while the extra amount going into your pension benefits from tax relief, as with other pension contributions.

You get tax relief on your pensions, meaning your provider automatically claims back the income tax you paid on your contributions. The provider will claim back 20 per cent relief, so if you are on the basic rate of income tax paying 20 per cent, you don’t need to do anything.

However, if you are on the higher rate of 40 per cent or on the 45 per cent additional rate, you will need to claim back the extra tax relief yourself, through self-assessment.

Using any unclaimed allowances

Ms Martin pointed to some important allowances to bear in mind when it comes to your pension contributions. She said: “The maximum you can invest in your pension each year and benefit from tax relief is £60,000 or 100 per cent of your income or profit, whichever is lowest. You can, however, use any unclaimed allowances from the past three years.”

This means that including the current tax year, you could be eligible to make contributions of up to £240,000 over the current tax year, if you use all three years’ worth of allowances. The rules state that you must use all of the current financial year’s allowance before using any previous ones.

Another thing to bear in mind when looking at your retirement finances is how much you will get through the state pension. The full new state pension currently pays £241.30 a week.

The age you can access the state pension is currently increasing from 66 to 67, moving up in stages between April 2026 and April 2028.