The recent surge in pension tax relief, exceeding £50 billion for the first time, marks a significant opportunity for savers to enhance their retirement funds.
This £14 billion increase over five years highlights the importance of strategic pension contributions and the effective use of tax reliefs.
Boosting contributions
In the 2022-23 tax year, taxpayers received £51.3 billion in tax reliefs on pension contributions.
For savers, this highlights the benefit of increasing pension contributions to maximise these reliefs.
Split between £25.4 billion from income tax and £25.9 billion from National Insurance Contributions (NICs), these figures represent a fantastic opportunity.
By boosting contributions, especially for higher-rate taxpayers, these reliefs can enhance retirement savings.
Pension tax relief now stands as the most substantial non-structural tax relief. For savers, this means prioritising pension contributions could be more beneficial than other savings avenues, given the higher tax relief available.
Understanding and capitalising on these reliefs is key to maximising pension pots.
Proactive approach
With the fiscal drag effect set to increase the cost of funding the income tax break on pensions to £27.7 billion next year, it would seem that savers should consider increasing their contributions now.
This proactive approach could yield more benefits before these changes take effect.
Conversely, with NICs relief expected to decrease slightly due to a two per cent cut in the National Insurance rate, savers should be aware of this impending change.
Adjusting contributions to maximise benefits before the cut can be a wise move.
The total tax relief in 2022-23 reached an impressive £51.3 billion, a more than £14 billion increase over five years.
This growth is partly due to auto-enrolment and wage growth, which have boosted pension contributions.
For savers, participating in auto-enrolment schemes and increasing contributions in line with wage growth are effective strategies to maximise pension benefits.
For a basic rate taxpayer, an £80 contribution is enhanced to £100 through tax relief, while higher rate taxpayers need only contribute £60 for the same benefit.
Savers should actively utilise this aspect of pension saving to significantly increase their retirement funds.
Key takeaways for savers:
- Boost contributions – Increase your pension contributions to take full advantage of the tax relief available, especially if you’re a higher-rate taxpayer.
- Stay informed – Keep abreast of changes in tax legislation, such as the fiscal drag effect and NIC rate changes, to strategically plan your contributions.
- Engage in auto-enrolment – Participate in auto-enrolment pension schemes, a straightforward way to start building your retirement savings.