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The Sadler Ledger: Why your Pension matters to your tax planning

Updated: May 8



Valentine’s Day might be over, but we’re still here to show your finances some love.


This month, we’re focusing on pensions, both state and private, so you can ensure you’re getting what you’re entitled to while staying tax-efficient. Because nothing says long-term commitment like a well-planned retirement! 💜


STATE PENSION


The state pension is awarded to recipients at the age of 67 or 68, depending on your year of birth, which you can check here. You will receive the pension when you have 10 qualifying years on your record. It is really important that you check your qualifying years, because HMRC gives you the opportunity to fill any ‘gaps’ you have in previous years.


WHY MIGHT YOU HAVE A GAP?


You might have gaps in your National Insurance (NI) record for various reasons, such as:


  • You moved abroad for a year and didn’t receive a UK salary;

  • You were in the UK but you were setting up your own business but didn’t pay yourself a salary;

  • You may have taken some time out from work and therefore not earned a qualifying level of income


WHY SHOULD YOU CHECK YOUR NI RECORD?


HMRC gives you the chance to fill gaps from a prior year, going back up to 6 years. However, until 5 April 2025, they are giving you the TEMPORARY opportunity to fill a gap in any missing year going back to 2006.


The cost of filling an NI year is about £800 per year. However, it could be the difference between receiving the UK state pension, or not.


To check the number of your qualifying NI years, click on the link below, and make sure you have your Government Gateway and password to login.




PRIVATE PENSION


Auto enrolment was introduced in the UK in 2012, and compels employers to offer pension contributions on behalf of employees, subject to employees co-contributing. Employees can opt-out, and also this isn’t required for directors managing their own companies (because directors are employees).


Outside of employment, people contribute to private pension not only as a way of saving for their retirement, but to take advantage of tax relief.


Quite simply the trade-off of putting money into a pension is always giving up your money NOW, knowing you will receive a higher retirement income at age 58, which is an age some people are sailing closer to than others\!


PENSION FOR YOUR OWN LIMITED COMPANY


For our clients who manage their own companies, making an employer contribution into a pension is one of the most effective ways of saving tax whilst also planning for the future.


Consider the two scenarios below:

Description

Option 1

Option 2

Profit before pension contribution

£50,000

£50,000

Pension contribution

£0

£10,000

Profit after pension contribution

£50,000

£40,000

Tax at 19%

£9,500

£7,600

Profit after tax

£40,500

£32,400


In option 2, you elect to contribute to your pension. This moves money out of your company bank account, into the pension fund. But you reduce the profit in the company, and therefore pay less tax – a saving of £1,900. Sounds like a good result, right? Yes but, goodbye £10,000 (until age 58).


THE SADLER LEDGER: FINAL THOUGHTS


As morbid as it might seem, particularly around Valentine's Day, you should also make sure that your Will is in order. Whilst pensions aren’t normally covered in your estate and therefore your Will, things are changing.


From April 2027, some pensions will also count towards your estate when you die, which means they could be subject to Inheritance Tax.


We’ve packed more information about state pensions and being more tax efficient with your private pension into our latest blog, so go and have a read or you can reach out to us directly.





Disclaimer: This blog post is for informational purposes only and does not constitute legal or financial advice. You should consult a professional advisor.


LOOKING AHEAD


The Sadler Ledger is our monthly blogs that are delivered first as email newsletters and we will cover relevant themes throughout the year.


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