Tax savings

One reason you might choose to save for your retirement with an AVC plan, alongside your main scheme pension, is the tax savings AVC contributions offer.

AVCs are taken from your pay before tax, so the money you’d normally pay as income tax will automatically go into your AVC pot instead, as you can see below. If you pay tax at a higher rate, your tax savings will be higher.

If you don't pay tax, you won't have been benefiting from tax savings on your pension contributions up to 5 April 2024. The Government has introduced arrangements for individuals who are not paying tax on their earnings to claim tax relief on their employee contributions to the scheme. This applies to contributions paid from 6 April 2024 onwards. You will need to contact HMRC to arrange this tax rebate. Claims will be processed in the tax year following the year claimed, i.e. claims for the current tax year would be processed by HMRC in the next tax year.

Income tax on pension savings

The total amount of tax relief you get on your pension savings is limited so make sure you're aware of the 'Important information about pensions allowances'. The UK Government may change these allowances from time to time so check their website to see any changes which may impact you. If you think you might be affected, you can get more information from the HM Revenue & Customs website.

If you're a member of a Salary Sacrifice arrangement, please speak to your employer about how this may affect you.

Tax savings will depend on your individual circumstances and rules can also change.

Your rate of income tax

As your contributions, including any paid by Salary Sacrifice, are deducted from your earnings before your tax bill is worked out, the amount of income tax you pay will be based on what’s left.

If you're a Scottish taxpayer, you’ll pay tax based on the Scottish rate of income tax and tax bands. For more information on Scottish income tax, visit gov.uk/scottish-rate-income-tax.

If you're a Welsh taxpayer, you’ll pay tax based on the Welsh rate of income tax and tax bands. For more information on Welsh income tax, visit gov.uk/welsh-income-tax.

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