There are many potential pitfalls to watch out for as people plan their retirement. Mistakes could prove costly, and a deadline is looming for Britons to claim tax relief on their pension contributions.
Becky O’Connor, Head of Pensions and Savings, interactive investor, offered some tips to help people stop tax from eating into their pension savings.
She urged people to ensure they take advantage of the tax relief available to them, as they may not always get it automatically.
Ms O’Connor warned: “Don’t forget to claim higher or additional rate relief via your tax return if paying into a personal pension.
“Basic rate tax relief is added automatically for you, but you’ll have to claim the rest back yourself via your self-assessment tax return.”
READ MORE: Free prescriptions ‘axed from April’ but 15 groups can already get them without charge
Ms O’Connor also encouraged people to find out whether making pension contributions could help them reduce their tax bill.
She said: “If you are approaching the next tax bracket and make pension contributions via salary sacrifice, upping your pension contribution can mean you don’t end up paying the extra income tax.”
The higher rate tax threshold is £50,270.
If someone was to get a pay rise from £50,000 to £53,000, they would then have to pay 40 percent income tax on the £2,730 above the threshold.
Ms O’Connor explained that if this individual essentially put their pay rise into their pension, they would avoid paying the higher rate.
She added: “This tip could come in handy with tax thresholds frozen but wages rising, dragging more people over the thresholds.”
Inflation is believed to be a potential contributing factor to more people finding themselves in higher rate tax bands.
The rate of inflation for the year to December hit 5.1 percent, a 10-year high.
By breaching certain earnings thresholds, Britons may also be denied benefits they had previously received, such as Child Benefit.
Child Benefit provides £21.15 per week for the first or only child, adding up to £1,099.80 each 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 per year, they lose all their entitlement to Child Benefit.