Black Friday is here, and as many of you will be aware it’s become the traditional day that retailers heavily discount some of their big-ticket items for often over-eager punters before Christmas. As an American import, the Friday in question is always the day following Thanksgiving and rose to prominence as it traditionally marks the first day of the country’s Christmas shopping season as well as being the busiest. So busy, in fact, that there have been reports of violence occurring between shoppers on Black Friday. Since 2006 there have been 10 reported deaths and 111 injuries throughout the United States.
Coincidentally, the term already existed in the UK before the sales tradition made its way over the pond. Both the Police and NHS internally refer to the last Friday before Christmas as Black Friday in reference to the alcohol-fuelled sharp increase in callouts they invariably see that night.
Fortunately, the pensions industry tends not to witness either outbreaks of violence between over-served festive revellers, or stampedes of customers desperate to grab a bargain. But that isn’t to say the deals can’t be just as good.
When paying contributions from your bank account, most pensions will grant 20% tax relief automatically. They do this by claiming the 20% directly from HMRC on your behalf and paying it in as a contribution. This works so that e.g. a £80 contribution is boosted into a £100 one after the provider claims £20 tax relief. Higher rate taxpayers can also claim higher rate relief (a further 20%) from HMRC themselves to reduce their tax bill when completing a self-assessment tax return. For more information, read our dedicated page on tax relief.
As the page explains, the limits on tax relief tend to apply on a tax year basis e.g. the maximum level of contributions that can be made is generally the lower of the £40,000 annual allowance and your taxable earnings for the tax year in which the relevant contribution being paid. So the pension world’s Black Friday is the 5th April, the last day of the tax year before the new one begins on the 6th April. And it is therefore last day that this tax year’s earnings can be claimed against.
You shouldn’t need to camp outside your pension provider’s doors Black Friday style, but nevertheless do be aware that because the end of the tax year is so busy for them, many providers will publish their own deadlines ahead of time as to when you would need to pay a contribution by in order for them to process it within the present tax year.
Having said all that, just like with the real black Friday, it remains important to maintain a sense of perspective on what’s affordable. Or not to let the tax tail wag the financial planning dog, as financial advisers like to say.
For example, it may not be in your best interest to spend your emergency fund on pension contributions if it means you end up needing to take out a potentially costly loan to pay for a new boiler in the future.
You may also bear in mind that even if you don’t make the most of this year’s annual allowance in the present year, you may be able to use carry forward to make up for it over the following three tax years anyway.