Pensions relieve the tax burden

Whether occupational or private, now is the time to join this most efficient of investments

Provided you live to enjoy it, a pension must be one of the best investments you can make because unlike PEPS, which you have to buy out of taxed income in order to get tax-free income out at the other end, you get tax relief in full on the money you invest in the pension, and only pay tax on the pension when you receive it.

If you contribute to an occupational pension scheme, your employer's contribution is not regarded as your taxable income. The money you contribute, however, is deducted from your income before your tax deductions are made. So if you earn pounds 40,000 and put pounds 2,000 into the scheme you are taxed on pounds 38,000 and save pounds 800 in tax.

Most company schemes are based on equal contributions usually between 4 per cent and 6 per cent of salary from both the employer and employee into a pension scheme. But tax relief is allowed on up to 15 per cent of earnings, which leaves most employees with scope for Additional Voluntary Contributions (AVCs) to an employer's pension scheme and free-standing AVCs (FSAVCs) to a scheme of your choice.

AVCs and FSAVCs are also treated the same way as contributions to your employer's pension scheme for tax purposes, but unused opportunities cannot be carried forward to a following tax year. Many occupational fund managers have their own rules about when AVCs can be made, but provided your employer's pension manager is flexible enough to cope with late additional contributions, the time to act is now.

If you are self-employed, or your employer does not have a company scheme, or if the employer is willing to contribute to one for you, you can have a personal pension scheme. Once again any employer's contributions are not taxed and you get tax relief on your contributions up to the highest rate you are liable to pay.

In the case of personal pensions however, the basic rate relief is taken off the contributions you pay, or can be used to increase the amount credited to your fund, while higher rate relief is returned to you by an allowance on your tax code for the following year. So a contribution of pounds 1,000 will cost you pounds 750 net this year with a further pounds 150 returned through a reduced tax code next year. (Next year when the basic rate of tax and tax relief falls to 24 per cent the net cost will edge up to pounds 760 but the higher rate taxpayer will get pounds 160 back.)

In view of the uncertainty which faces the self-employed, contract workers and employees whose employer does not have an occupational scheme, the amount you can contribute tax-efficiently to a personal pension plan rises from 17.5 per cent at the age of 35 and under, rising in steps to 30 per cent in the year you reach 51 and a maximum 40 per cent in the year you reach 61.

What is more you can pay premiums for any eligible contributions that you have not used in the current tax year during the first three months of the following year and still reclaim the tax allowances. You can also carry forward unused contribution allowances for a further six years, so there is no actual rush to get in before the end of the tax year. That said there is nothing much to be gained either by waiting until July 5.