How to use pensions to become more tax efficient

Happy new tax year! We are a month into 2019/2020 already and, in an effort to help you be more tax efficient, this column concentrates on how to use one of the most tax efficient savings vehicles available in this country – pensions.

Pensions' legislation is fiendishly complicated but, if tackled in the right way, pensions are great tax efficient investments.

Income Tax – there are limits on how much you can pay into a pension each year and claim income tax relief.

The most you can contribute is £40,000 or 100% of your earnings if you earn less than that amount.

If you are lucky enough to earn over £150,000 per year the amount you can contribute is reduced.

The great news is that even if you do not work and do not have any taxable or pensionable earnings you can still contribute to a pension and get income tax relief.

You can contribute £2,880 into a pension and the government will contribute £720. If you are a non-tax payer that's £720 of income tax that you haven't paid - a 20% return on your money overnight.

Pensions are great for children. Adults can make the contributions (£2,880) on the child's behalf and the tax relief remains the same, £720.

As the fund cannot be accessed until the pension holder reaches 55 there is no danger of impulsive youthful purchases (fast car? Motorbike?) being made with the money.

Investments within pensions grow free of income tax.

Capital Gains Tax - Investments within pensions grow free of capital gains tax.

Inheritance Tax - Pensions are held in trust and trusts do not form part of an individual's estate on death. If the pension holder dies before the age of 75 the fund can be paid out, tax free, to beneficiaries. Different rules apply after the age of 75 but efficiencies are still possible.

PLEASE REMEMBER: investments held within pensions may go down as well as up; charges will apply; income from pensions is taxable at the pension holder's marginal rate. Always seek advice.