How paying into a Sipp or work pension by 5 April can cut your tax bill

Topping up your pension ahead of the tax year end deadline can be a winning strategy all round if you can afford it, according to money experts.

Diverting more of your earnings into your retirement pot can keep you below income tax thresholds which have been frozen until 2028.

It can also keep your income below the levels where child benefit starts getting reduced or withdrawn altogether.

Should your employer offer a salary sacrifice option, you will both make a saving on National Insurance contributions.

And if your employer matches increased contributions as a percentage of your salary, you could get extra free cash from that source by paying in more on an ongoing basis.

If you get a pay rise paying more into your pension can be a ‘secret weapon’ to help you keep more of your hard earned cash, says Dean Butler of Standard Life.

Pension contributions can improve your finances in the future and today as well, adds Helen Morrissey of Hargreaves Lansdown.

Here’s what you need to know if you are deciding whether to add to your pension by the 5 April deadline.

Diverting more of your earnings into your retirement pot can keep you below income tax thresholds

What are the tax benefits of topping up your pension?

Making pension contributions reduces your taxable income, points out Hargreaves’ head of retirement analysis Helen Morrissey.

They can make a huge difference if you are close to the cusp of paying a higher rate of income tax, she says.

‘Someone paying £55,000 would pay higher rate income tax, but if they make a £5,000 gross contribution to their pension it would bring their income down to £50,000 so they would remain below the threshold.

‘This not only means you pay less tax but depending on what you earn, it can also impact your eligibility for things like child benefit.’

Lucie Spencer, financial planning director at Evelyn Partners, says: ‘Millions more people are finding themselves drawn into higher tax bands as their income increases.

‘The tax benefits of contributing to pensions are substantial and increase with earnings.’

She offers the following examples of how the Government ensures pension contributions are made tax-free, and how people who are paying more tax benefit the most.

Basic rate: If you subscribe £800 to a pension, the Government pays in an extra £200, a boost of 25 per cent to your pot, for a gross investment of £1,000.

Higher rate: If you put in £600, the Government puts in £400, for a £1,000 gross investment.

Additional rate: If you put in £550, the Government puts in £450 for the same £1,000 gross investment as above.

The thresholds to be aware of are £12,570 to become a basic rate taxpayer, £50,270 to reach the higher rate, and £125,140 to hit the additional rate. (Scottish income tax bands are different.)

Child benefit starts to be reduced when you earn £60,000 and is wiped out altogether at £80,000.

Topping up your pension: From left, Helen Morrissey, Lucie Spencer and Dean Butler offer tips

Dean Butler, managing director for retail direct at Standard Life, says: ‘Pay rises are great, and a lot of people get them this time of year.

‘However, those whose pay increase lifts their income above £50,271 (or £43,663 in Scotland) may find themselves brought back down to earth upon realising they’ve been pushed into a higher rate tax bracket and are therefore required to pay 40% tax (42% in Scotland) on earnings above this threshold.’

Butler says with tax bands frozen until 2028 and wages rising, the number of UK taxpayers subject to higher rate income tax is estimated to have risen by 30 per cent since the 2021-22 tax year to 6.31 million in the current one.

‘The next three years will see more and more people enter the higher rate tax brackets, unless the freeze on extending tax brackets is lifted.

‘Pension saving is a particularly good way to protect your income by reducing your tax bill, while also allowing you to save for the future.’

How to top up your pension before 5 April

You can do this by opening or paying more into an existing Sipp (Self-Invested Personal Pension), or putting extra into your pension at work.

If you are using a Sipp that’s in place already you should be able to do this easily, but if you are topping up a work pension there can be a bit of admin involved in putting in a lump sum so don’t delay contacting your scheme given the 5 April deadline.

You should bear in mind the annual limit on contributions that receive tax relief, although this is generous at £60,000 or up to 100 per cent of your annual earnings if they are lower.

The limit includes your own and your employer’s contributions into a pension, and the tax relief itself.

As explained above, your employer might offer higher matching contributions, where it ups the percentage of salary that it puts in if you do on an ongoing basis.

If you have not yet maxed out this perk, you can get extra cash from this source too.

Spencer says: ‘A Sipp typically offers a wider investment choice than a workplace scheme, but your work pension may be more cost effective if your employer matches higher levels of contribution or offers a salary sacrifice scheme.

‘With salary sacrifice, staff can reduce their taxable income by toping up their pension and as well as a reduction in income tax, both employee and employer will pay lower National Insurance contributions, making pension saving even more tax efficient.

‘This can be even more beneficial for entrepreneurs running limited companies as their pension contributions can also be offset against corporation tax.’

Butler warns that if you are a higher rate tax payer you might not receive pension tax relief automatically – you might have to claim it.

‘Depending on how you make your payments, you may need to complete a self-assessment tax return.’ he says.

‘You’ll then either get the tax back as a rebate at the end of the year or through an adjustment to your tax code. Tax relief can only be claimed back for the last four tax years.’

Whether you have to claim depends on your employer’s pension arrangements. We explain how to check and claim higher rate tax relief here.