Money: Get some relief by boosting your pension

An opportunity for some tax payers to beef up their pensions and cut their tax bill at the same time has arisen with the start of self- assessment, says Jo Gill.

The introduction of self-assessment has provided a six-month window of opportunity this year that would otherwise have been unavailable to reduce your tax bill by making pension contributions and claiming tax relief.

And with only10 days to go until the 31 January deadline, a pension contribution could do wonders for your cash flow.

Mike Warburton, senior tax partner at Grant Thornton, explained: "If you haven't already put your tax return in you can make a pension contribution now and elect to carry it back to 96-97 with the benefit being taken in the balance of payment due from you at the end of the month."

In practice this means that for every pounds 100 contribution made to a personal pension, a higher-rate tax payer will receive pounds 40 worth of tax relief which can be deducted from the 96-97 bill.

It is an option open to all earners who are not in a pension scheme already, and those in a personal scheme who have not contributed the maximum allowed.

Iain Oliver, pensions development manager at Commercial Union, believes the new rules could substantially ease the cashflow situation of the self- employed. "The trick is to carry back contributions made in the 97-98 tax year, so that for tax purposes they are treated as if they were paid in the 96-97 tax year," he said.

This has the effect of reducing taxable earnings in the year now being assessed, which reduces the amount of tax the self -employed need to pay by the end of January, he explained.

"The object is to give them immediate tax relief," he said.

And for those who paid contributions in 96-97, additional relief can be claimed and taken off any imminent bill. "All they need to do is elect, before 31 January, to carry back the pension contributions they have made to 95-96," said Mr Oliver.

For someone who paid higher rate tax in 95-96 but not in 96-97 an additional pounds 17 of relief for every pounds 100 paid would be granted by carrying the contribution back.

Even basic-rate taxpayers could be better off as the basic rate of tax, and therefore the relief granted, reduced from 24 per cent to 23 per cent over this period, giving an extra pounds 1 of relief for every pounds 100 paid.

But John Whiting, a tax partner at Price Waterhouse, warned that the revenue could take a dim view of people who wrongly deduct any tax relief gained by backdating pension contributions from their 31 January bill.

"Strictly, you should pay it [the full bill] and submit a claim," he said. "If you pay it without you are taking the risk you might not have a valid claim."

But Mr Whiting said anyone found to be in breach of the revenue's rules would not be fined. "If you take a reduction in the 31 January bill it will pan out and you will get a reduction although you might have to pay a bit of interest," he said.

The Independent has published a free 26-page guide to pension planning, written by Nic Cicutti, personal finance editor, which explains how to prepare for your retirement. The guide, sponsored by Eagle Star, discusses what kind of pension you may need and how to find it. It is available by calling 0800 776666. Or fill in the coupon on this page.