TAX NEWS - 2010

UK Tax: Take advantage of tax relief on pensions

2010 UK Budget contained some good news for higher earners: the 40% tax relief threshold will remain. This means that if your income is over £37,400, you could be in line for a welcome tax bonus when you retire.

Some had feared that this saving incentive faced the axe in George Osborne's 'bloodbath' Budget. Not least because the Lib Dems had talked about removing it in the build up to May's election. But it survived unscathed.

The way it works is this. When you contribute into a pension plan, you immediately get tax relief on your contributions. Effectively, the state gives you back the income tax you paid on the money you're saving. That means higher rate, 40% tax payers only need to save £60 to see £100 trickle into their pot.

You are then taxed properly when you draw on your pension. And here's the clever bit. If, when you've stopped working, your income has dropped below £37,400, you'll be a basic rate taxpayer. When you draw on your pension, then, you'll only pay tax at 20%. Thus you will have saved 20% in tax by saving into a pension.

Peter Flowers, an independent financial adviser at CareMatters, says: 'For those of us who have to arrange their own pension - there was good news for high rate tax payers who will continue to receive 40% tax relief on their pension contributions, so it continues to make sense to put as much as you can spare into your pension.'