Pension contributions from interest earned to reduce tax bill

JonBr

Probably been asked before but I couldn't find it!

I am retired, and live off interest from various taxable savings products. This tax year, due to some longer term bonds maturing around the same time, I will have earned about £35k in interest. I calculate that this will mean paying £4,300 in tax. The calculation is something like 35k - 12.5k (my personal tax allowance) - 1k (the interest earned allowance), then 20% (lower tax rate) gives 4.3k.

I have a personal pension that I do not presently draw on. I think I can reduce my exposure to the tax payable by investing some of my income in the pension. This is the case for normal earned income, but does it apply also to uneraned income like interest? I assume so, but i'd like to know for sure!

(Of course, I know I am just deferring the tax payable.. However, the 25% tax free pension drawdown rule in practice reduces the total tax payable and of course I could benefit from investment growth on the amounts paid into the pension.)

TheSpectator

If you are not a higher rate taxpayer then paying into a personal pension will not affect your tax liability.

If you did decide to contribute then as you have no earned income the maximum you can contribute is £3600 including the tax relief, so net £2880.

Edit to add - you will also have the savings starter rate of £5000 @ 0% so £6000 in total at 0% assuming that the interest is your only source of income.

Albermarle

You can only get tax relief on earned income. In your case the max you can add is detailed in the post above.

On the point above about the savings starter rate, you can read about it here.
How the starting rate for savings works - Money Saving Expert

Note that when you get the state pension, this is taxable income and will take up most of your personal allowance.