11/26/07Boost your pension now

The basic rate of tax is due to fall to 20p in April 2008, so there is limited time for basic rate taxpayers - and those who do not pay tax - to maximise the value of pension contributions.

The basic rate of tax is set to fall to 20% next April, so those paying £200 a month net who currently receive an investment value of £256.41 a month (thanks to grossing up of the basic rate tax relief) will then only benefit from £250 a month going into their pension. This might not sound much of a drop, but over time and pensions are all about the long term it will add up.

So, putting as much as you can into your pension this year could be well worth your while; especially when you remember that the growth of your pension fund is free of UK tax (other than the 10% withholding tax on dividends from UK companies, which can no longer be reclaimed).

For most people, pension contributions are paid out of income which makes sense, because pensions are supposed to replace your income when you retire. However, there can be times when you suddenly have access to a large amount of money - perhaps as the result of a large bonus, an inheritance or even a win on the National Lottery!

New rules introduced in April 2006 mean that everyone can invest up to their entire income from employment, trade or profession into a pension scheme and receive tax relief on the contribution, up to the total amount of tax they pay. So if you earn £38,000 and are therefore a basic rate taxpayer, and wish to put (say) £29,640 into a pension you could currently receive an investment value of £38,000.

Next year, the same contribution would be worth £950 less to you.

Non taxpayers can also invest up to £2,808 a year and have an investment worth £3,600 made on their behalf, thanks to the tax relief available at source. Next year, the net contribution will be £2,880 to achieve the same result. The difference is almost half the amount by which the government has increased the state pension this year.

For higher rate taxpayers, there is no change because they receive tax relief at up to 40%. However, their net payment will go up, with the balance of the tax relief coming through their self-assessment.

In any event, making a large payment at any time could make a substantial hole in their tax bill for the year and provide valuable retirement benefits.

One word of caution - if somewhat early - remember that if you are making pension contributions by direct debit, your net payments will go up on the first contribution date on or after 6th April 2008.