Be savvy with your savings

It is perhaps not the right time to think about paying more into savings, when the cost of living is sky high; but knowing how to make any savings work for you is vital to ensure that you benefit from the personal allowance and tax relief which is applied to pensions and stocks and shares ISAs, which many people hold.

Stocks and Shares ISAs, Cash ISAs or a Lifetime Allowance ISA

Any money paid into these savings plans or withdrawn from them remains tax- free.

The tax-free ISA allowance, up to 5th April 2023 is currently £20,000 per person per tax year.

Many people are aware that the tax free allowance can be carried forward for up to 3 years, but the chances of people taking advantage of it at a later date is decreased if they don’t get into the habit of taking advantage of it on a yearly basis.

What is pension tax relief and how do you receive it?

When you save into a pension, the government usually gives you a top up as a way of encouraging you to save for your future. After all, the state pension age is moving further away from 65 each year, so now, more than ever before, we need to plan ahead.

Generally speaking the more income tax you pay, the greater the tax relief on pension contributions. If you’re a basic rate taxpayer, for every £800 you pay in, you will receive tax relief to make the contribution up to to £1,000. If you’re a higher or additional rate taxpayer you can claim back up to an additional 20%, or 25% on top of the 20% basic rate tax relief, through your tax return.

For most people, tax relief is available on pension contributions of up to £40,000 per tax year, or 100% of your income, whichever is lower. Your annual allowance will be tapered if you earn more than £200,000 and your income and pension contributions made on your behalf exceed £240,000.

For those who don’t pay tax, you’re still entitled to receive basic rate tax relief on pension contributions. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you include the available tax relief.

Make the most of your annual allowance- it’s worth it.

If you are a basic rate taxpayer, for every £100 you put into your pension, your pension provider will add an additional 20% to your pension pot. In effect the tax will be added to your pension.

You are eligible to get tax relief on pension contributions up to 100% of relevant earnings, up to a maximum of £40,000. This limit is known as the “gross” pension contribution, in other words, the figure that includes the top up added by HMRC.

If you do not have an income, the maximum contribution you can make is £3,600 gross. By making your pension contributions before April, you can maximise the tax relief available to you for the year before it resets again for the next year. It is possible for you to use previously unused allowance, but it is best to get into the habit of capitalising on tax relief on a yearly basis, as far as possible.