Pension contributions have tax consequences when contributed by taxpayers.

Growing old is an inevitable aspect of life.

As an individual age, they expectedly reduce their strength and capacity to work as much as they used to.

It is, therefore, essential that effective and beneficial plans for their old-age days are put in place.

Pension contributions are one of the financial obligations and rights of employers and employees, not just in the UK but in many countries all around the world.

It is a retirement plan for the future and entails putting a part of your income aside for you to live on when you grow old and can no longer work to make a living.

Growing old can also put you at risk of depending on other people for basic things such as food and clothing.

To avoid this or reduce its occurrence to the barest minimum, a pension allows you to plan adequately and be independent for yourself and for your loved one

Revenue gives tax relief for contributions made into a pension fund.

Conditions for the relief from pension contributions.

• The maximum tax relief that can be enjoyed will be based on a minimum of £3600 and the relevant earnings in the tax year.
• Relevant earnings of a taxpayer are the employment income, trading income, income from furnished letting, benefit in kind, etc.

How tax relief is claimed from pension contributions?

A net pay arrangement is used to receive tax relief for the taxpayer that contributes to using an occupational pension.

The way net pay works; payroll will be applied to the taxpayer’s salary after the pension contribution has been deducted.

How tax relief is calculated in pension contributions?

If an individual earns £1000 (ignore personal allowance), you pay tax at 20%. The tax due will be £200

However, when an individual does make a £100 contribution to a pension scheme under the net pay arrangement.

The taxpayer net pay after pension deduction will be £900. The tax due will be £180, thereby saving £20. Our Northampton accountants can prepare your annual accounts and calculate your income tax liability or refund. We will process your tax returns on your behalf.

Under a personal pension contributions scheme.

The taxpayer that contributes to a personal pension scheme also receives tax relief.

The taxpayer can claim their tax relief through self-assessment rather than from their income.

Second tax relief from pension contribution into a pension scheme.

When an individual reaches the age of 55, they can draw money out of their pension fund.

The first 25% of the pension fund will be drawn tax-free and the remaining 75% will be taxed under income tax.

Changes that were made to the pension contributions.

Taxpayers were given several options when withdrawing money out of their pension funds.

1. The taxpayer can withdraw the pension pot You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum.

The remaining 75% can then be converted into taxable income for life called annuity.

2. They can withdraw the whole pension as cash: With this option, the taxpayer will withdraw 25% tax-free, however, the remaining money received will be taxed under income tax.

So, therefore, the taxpayer will most likely be paying more tax that tax year.

3 The taxpayer can choose to take 25% of the pension of your pension pot tax-free. The remaining will then be used to reinvest into other funds.

This will then provide regular income for future use.

4. A taxpayer can also take a small cash lump sum every tax year.

The taxpayer will then have 25% of the withdrawal tax-free.

The remaining 75% will be taxed under income tax, however, this will help to spread the tax effect of the withdrawer.

Conclusion pension contributions.

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