There are many potential pitfalls to watch out for when people are planning for retirement. Mistakes could prove costly and a deadline is looming for Britons to seek tax relief on their pension contributions.
Becky O’Connor, Pensions and Savings Manager, Interactive Investor, offered some tips to help people avoid tax eating away at their retirement savings.
She urged people to make sure they take advantage of the tax relief available to them, as they don’t always get it automatically.
Ms O’Connor warned: ‘Remember to claim higher or additional rate relief via your tax return if you are contributing to a personal pension.
“The basic rate tax relief is added automatically for you, but you’ll have to claim the rest yourself through your self-assessment tax return.”
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Ms. O’Connor also encouraged people to find out if paying pension contributions could help them reduce their tax bill.
She said: “If you’re nearing the next tax bracket and making pension contributions through a pay sacrifice, increasing your pension contribution may mean you don’t end up paying the extra income tax. .”
The highest tax threshold is £50,270.
If someone were to get a pay rise from £50,000 to £53,000 then they would have to pay 40% income tax on the £2,730 above the threshold.
Ms O’Connor explained that if this person basically rolled their pay rise into their pension, they would avoid paying the higher rate.
She added: “This trick could be useful with frozen tax thresholds but rising wages, driving more people over the thresholds.”
Inflation is believed to be a potential contributing factor to more people falling into higher rate tax brackets.
The inflation rate for the year to December hit 5.1%, a 10-year high.
By exceeding certain income thresholds, Britons may also be denied benefits they previously received, such as child benefit.
Child Benefit provides £21.15 per week for the first or only child, making a total of £1,099.80 per year.
Britons can also get an extra £14 a week, or £728 a year, for any additional children.
However, once someone earns more than £60,000 a year, they lose all child benefit entitlement.