Reducing tax: private pensions

Sophie Kwiatkowski urges dental professionals to minimise their tax liability now… while they can!

In last month’s article, I briefly outlined ways in which you can look to reduce your tax liability before 5 April passes. The two main tax saving ideas highlighted were private pension contributions and training costs.

Let’s take a look at private pensions in
more detail.

Private pensions

The benefits of pension contributions are twofold. Firstly, they provide you with tax relief in the year in which the contribution is made. In 2018/19, you can have tax relief on the lower of pension contributions up to 100% of your earnings, or the £40,000
annual allowance.

If you have unused pension allowances from the past three tax years, you can carry them forward. Secondly, pensions are a useful saving method to help you build up funds for your retirement – which may seem a long way off!

So, how is the tax relief given? Basic rate tax relief is given by adding 20% to the net contribution you make, so that the gross amount is invested into your pension. So, for example, if you were to make an £80 contribution per month into a pension, basic rate tax of £20 is added, so that the gross contribution made is £100 each month. If you are a higher or additional rate taxpayer, you are given tax relief in a slightly different way. Your basic rate band is extended, so that you pay more tax at 20% as opposed to 40%/45%. For 2018/19, the basic rate band is £34,500. So, £100 per month would mean an annual contribution of £1,200, which would extend your basic rate to £35,700.

Other tax reducing ideas

  • Charitable donations made through gift aid give the charities an extra 25p for every £1 donated, without costing you more
  • Buy assets. Cameras, loupes and computers are large items of capital expenditure which if you purchase before 5 April can give you tax relief in 2018/19. You will get the full cost deducted, unless there is any private use.

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