Pensioners are being urged to take action or risk losing thousands of pounds ahead of the new tax year which begins tomorrow (Wednesday, April 6).
With pension seen as a vital part of retirement solution, every penny counts when planning for the end of your working life, so here are some actions Britons can take, reports My London.
A key way to save is on your pension, which will underpin your retirement. Tom Selby, head of retirement policy at AJ Bell, said: “The end of the tax year is a natural time for people to check they are making use of their annual tax allowances before they expire on April 5, and they shouldn’t forget their pension when doing this.
“With the cost of living on the rise, saving for the long-term might feel like a luxury people simply cannot afford. However, it’s important to remember the earlier and more often you save, the easier the journey to a decent retirement will be.
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”A key tip has been reserved for self-employed individuals, many of whom do not formally save into a pension. Making a small tweak and deciding to put money into a formal arrangement could be beneficial for later life, but also for tax implications in the here and now.
Mr Selby explained: “If you’re self-employed then paying your profits into a pension is a great way to lower your tax bill. Take the example of a higher-rate taxpayer who owns a company and expects to turn a profit of £20,000 in the 2021/22 tax year.
“If they are able to pay the entire £20,000 profit from the company directly into a pension as an employer contribution, the company shouldn’t have to pay any tax or employer National Insurance on the contribution. The money will be able to grow tax-free, with tax only coming into play when you come to make a withdrawal from age 55.
“In comparison, if they were to take the profit as salary (assuming the entire £20,000 remains in the higher-rate tax band), they will have to pay at least £400 in employee National Insurance and £8,000 in income tax. In addition, the business will have to pay employer National Insurance at 13.8 percent (£2,760).”
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If a person decided to take their £20,000 profit as a divided, there would also be major tax implications. Mr Selby first highlighted the fact corporation tax would be levied at 19 percent - a hefty price to pay. It would automatically reduce the money a person has to £16,200, but this is not the end of the matter.
Individuals would then have to pay a tax of 32.5 percent on the dividend above £2,000 - the dividend allowance. This would mean ultimately they would end up with £11,585 after tax, and losing over £8,000 to tax may be a bitter pill to swallow.
For those making major decisions about their pension, the Government-backed service Pension Wise is available. Alternatively, individuals may wish to seek their own regulated financial advisor for tailored assistance.
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