Erin Bisson, senior manager for BWCI Consulting, looks at how pension contributions can
affect a person’s tax position
IN order to encourage pension savings in Jersey, the government offers tax relief on contributions to approved pension schemes.
In general*, up to £50,000 of annual pension contributions can be deducted from your taxable income, which is then used to calculate the income tax and long-term-care contributions you pay.
Although you will be subject to tax in retirement on your pension income, you may be able to take a 30% tax-free lump sum, meaning part of your pension savings do not get taxed at all.
How much do employers pay versus employees?
This will be specific to your pension scheme. Employers often use contribution structures to attract and retain employees. A common approach is contribution matching.
A matching structure means your employer promises to pay the same percentage of your salary into the pension scheme as you do (usually up to a certain limit).
For example, for a scheme where an employer matches contributions up to 5% of salary, if you pay in 5% of your salary, your pension will be credited with 10% of your salary.
However, if you only put in 3%, your employer will only pay 3%, making 6% in total.
Therefore, if you put in less than 5%, you are effectively missing out on free money from your employer. You should consider carefully before deciding to contribute less than the amount your employer would match, as you would be turning down a lot of pension relative to the amount you could take home instead.
The exact tax benefits of pension contributions will depend on your personal circumstances, including any deductions or allowances that you may be entitled to. The government provides an online tax calculator which can be used to assess how pension contributions could affect your tax position.
*For each pound that a person’s income is over £150,000, the government withdraws £1 of pension contribution tax relief. A person with a salary of £200,000 or more could therefore lose all tax relief on their pension contributions.
