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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Act now as the rules could change in the near future

As the end of the tax year approaches, savvy investors will be considering how to make the most of the various savings incentives on offer from the Government.

And with Philip Hammond preparing his first Budget as Chancellor in an environment of political and economic uncertainty, there is no guarantee the tax breaks available in 2016/17 will continue to be on offer in 2017/18 and beyond.

So here are a few of the key things you need to know about pension allowances you can take advantage of right now.

Annual allowance

Pensions continue to attract tax relief at your marginal rate. So if you’re a 40% taxpayer and pay £800 into a pension, you automatically get £200 in tax relief from the Government.

You can also claim a further £200 through your self-assessment tax return. That means a £600 contribution is converted into £1,000 in your SIPP through tax relief.

Pensions tax relief is subject to an annual allowance of £40,000, so a higher rate taxpayer can make up to £32,000 in personal contributions a year, receive an automatic Government bonus of £8,000, and then claim back another £8,000.

Pensions offer the most generous savings incentives around, although your money is locked away until age 55. If you haven’t used all your annual allowance for 2016/17 and have some money spare, consider upping your pension contributions before April.

It’s also worth noting that the annual allowance has been cut back severely since 2010, so there’s no guarantee it will remain as generous in the future.

The rules for higher earners

Your annual allowance will be lower if you have total adjusted income of more than £150,000.

Under Government rules, your allowance decreases by £2 for every £1 of adjusted income you earn above £150,000, down to a floor of £10,000. You can learn more about how this works here.

In addition, if you have taken any income aside from your 25% tax-free cash from your pension, your annual allowance for money purchase plans like SIPPs drops to £10,000.

From April, anyone who has accessed their pension flexibly will be subject to a £4,000 annual allowance.

How to boost your allowance

It is also possible to boost your annual allowance to a massive £160,000 by using ‘carry forward’ rules. Carry forward allows you to use unused allowances from up to three previous tax years to increase your annual allowance in the current tax year.

You will not be able to use carry forward if you have already accessed your pension flexibly.

Some of this is quite complicated, so if you’re unsure about whether you can take advantage of the rules outlined above it’s worth speaking to a regulated financial adviser.

Tom Selby,
senior analyst, AJ Bell

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