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Pensions

Tax relief: a race against time for pension savers

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Pension savers are being urged to see a financial adviser about whether they should make additional contributions before the new tax year when the rate of relief is to be cut, writes Holly Thomas

Up to £2.6 billion in unclaimed relief could be lost forever, according to pensions provider Skandia, if action is not taken by April 5 when the basic rate of income tax will fall from 22 per cent to 20 per cent.

Alongside that drop, the basic rate of tax relief available on pensions will also fall at the same rate.

This means that basic rate taxpayers paying into a pension on April 6 will receive two per cent less tax relief than if they pay in the day before.

The government adds back the income tax it deducted from any taxed income you put into a pension.

For example, each £78 invested now instantly becomes worth £100. But after April you will need to pay more to reach the £100 mark.

Nick Bladen, head of pensions and bonds marketing at Skandia, said: "Pensions are one of the most tax-efficient ways of investing, but the amount of basic rate tax relief available will drop overnight on April 5.

"A two per cent drop might not sound like much, but over time the effects will add up. Anyone thinking about paying into a pension this year should speak to their financial adviser about contribution strategy and timing.

"The deadline is fast approaching and planning ahead will be better than last-minute planning."

Skandia says there are around 40 million people aged between 20 and 75 in the UK that can each contribute £3,600 to their pension, or more if their earnings are higher than this.

Before the end of this tax year there would be £28.5 billion of basic rate tax relief on these pension contributions. But the cut in tax relief will reduce this by a minimum of £2.6 billion overnight.

Owain Wright of Saga said: "Most of us would view a tax cut as a good thing but do spare a thought for basic-rate tax-payers paying into their pensions.

"If you're a basic rate tax-payer and are considering an investment into your pension, do it this tax year rather than next and, for every £100 invested, you'll be £3.21 better off."

Higher-rate taxpayers paying into a personal pension receive basic tax relief at source, and can claim additional higher rate tax relief in their annual tax return.

* Holly Thomas is the deputy personal finance editor of the Daily Express and Sunday Express. Holly's opinions are her own and for general information only. Always seek independent financial advice.

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