Rachel Reeves is after your income – fight back with secret tax weapon | Personal Finance | Finance
Your pension could be a secret weapon to defeat Rachel Reeves (Image: Getty)
The chancellor’s decision to extend the freeze all the way to 2031 will drag millions of Britons into higher tax brackets, where they’ll hand even more of their income to HMRC. Yet many may have a forgotten secret weapon, in the shape of their pension. By increasing contributions, you can defeat Reeves on two fronts. First, by claiming valuable tax relief on contributions, potentially worth thousands of pounds. Second, if you can bring your income below one of the higher thresholds, you’ll avoid more punitive rates of tax. The key is to act before the end of the financial year on April 5, which is now less than two weeks away.
While all the focus today is on using the annual tax-free ISA allowance, massively valuable pension tax benefits can be claimed as well. Pensions remain one of the most tax-efficient ways to build long-term wealth, and there’s still time to make the most of this year’s allowances. Maike Currie, personal finance expert at PensionBee, said with tax at record highs it’s more important than ever to fight back. “Used correctly, pensions can be even more powerful than ISAs.” She listed five pension moves to consider in the final days of the tax year.
1. Use your annual allowance. Everyone can contribute the equivalent of their annual income to a pension each year with tax relief, up to a maximum £60,000. “This amount is known as the annual allowance and any contributions over this limit are taxed at your highest rate,” Currie said.
The annual allowance is three times bigger than the £20,000 ISA allowance, so it’s really valuable. Pension savers all get basic rate tax relief at 20%, while higher earners can claim more via self-assessment, lifting total relief to 40% or 45%. However, higher earners should be aware of the tapered annual allowance, which can reduce the annual allowance to £10,000 once income exceeds certain thresholds.
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Crucially, savers can also use ‘carry forward’ rules to mop up unused annual allowance from the previous three tax years. Those can be particularly useful for those who have taken career breaks or worked part-time. “It can also be extremely valuable to high earners, who are caught by the tapered annual allowance,” Currie said.
2. Beat sneaky HMRC tax traps. Frozen tax thresholds are pushing more people into higher tax bands. Higher earners on between £100,000 and £125,140 face an effective 62% marginal tax rate due to the withdrawal of the personal allowance. “Pension contributions could help by reduce income below the higher rate threshold,” Currie said.
Net income above £100,000 also removes eligibility for 30 hours of free childcare. Increasing pension contributions could also restore this benefit.
This is particularly attractive for those who work for a company that has a salary sacrifice pension scheme, as they also save on national insurance. “If you pay into a personal pension, the provider will add 20% tax-relief, and you can claim higher rate relief via self-assessment.
3. Don’t overlook non-earners. Even if you’re not working, you can still contribute to a pension. Up to £2,880 can be paid in each year. This attracts £720 basic rate tax relief, which lifts the total contribution to £3,600.
It’s also possible to contribute to someone else’s pension, and you don’t need to be married or in a civil partnership to do so. Contributions can be made into a partner’s pension, or even for children via a Junior Self-Invested Personal Pension (SIPP). This can reduce your family’s overall tax bill.
4. Plan pension withdrawals. With pensions set to become liable for inheritance tax from April 2027, more retirees may consider accessing larger sums earlier. But Currie warned: “Taking large one-off sums without planning can push you into a higher or additional rate tax band. So think strategically about timing.”
Use any unused lower-rate tax band in the current year, to avoid a larger withdrawal pushing you into a higher tax bracket later. “Planning ahead can help smooth your tax position and maximise what you keep,” Currie said.
5. Protect your bonus. Bonus season coincides with the end of the tax year. Directing some or all of a bonus into a pension can be a highly tax-efficient move,” Currie said. “Salary sacrifice can make this even more efficient.”
