Money tip #67 – Make pension contributions on behalf of your spouse and children and get tax relief even though they don’t pay tax!
Update 22nd July 2013
This particular idea has been raised before on this blog but I felt it deserved to be a tip in its own right, so that I could add some meat to it.
Under current pension legislation you can invest up to £2,880 net each tax year into separate pensions for your spouse and each of your children, even if they do not earn anything. Yet your net contributions will still receive basic-rate tax relief! So for a cost of £2,880 each tax year your spouse or child will get their pension pot topped up by £3,600.
This bit of pension legislation is particularly advantageous to people (aside from non-earners):
- who fall into the new 45% income tax bracket - Funding pensions in this way for your spouse and children can be very attractive from an income tax mitigation perspective if you are a high earner and where you and your spouse plan to share your retirement income.
- who will be subject to a rate of income tax in retirement in excess of the rate of tax relief their own pension contributions enjoy (for example they may have other new sources of income in their retirement) - For these people they would essentially be taxed more on the money coming out of their pension than the relief received going in – so making pension funding for themselves less attractive.
- where the spouse will remain a non-tax payer in retirement.
- who have already contributed the maximum permissible amount to their own pension for the tax year in question - Contributing on behalf of your spouse will increase your ‘joint’ pension pot while reducing your tax bill.
But, this ability to get tax relief on pensions contributions leads to a very interesting loophole which can effectively generate non-earners (or indeed high rate tax payers) a guaranteed instant 20% investment return by flushing money through a pension and back out the other side. Not a bad thing in the current economic climate. But in true ‘who wants to be a millionaire’ style let’s take a quick break……………..but I will reveal all in the coming days.
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