LISA or pension

[fatandwheezing]

As I'm rapidly approaching 40, I'm considering whether I should open a LISA as an extra fund in retirement. As I've blundered my way into the 40% bracket in the last couple of years, my understanding was that the tax rebate on the pension was superior, therefore to just pay more into this.

I have just become a company shareholder however, with a chunk of my salary being converted to dividends instead (main salary now back firmly in the 20% bracket), so now I don't know how to work out what is best - I've not found a single online calculator that includes dividends, so am a bit stuck.

Any pointers would be gratefully received.

[JulianPH]

Dividends do not count towards qualifying earnings for pension contributions, so it is no surprise you won't find a calculator that includes them!

Maxing out your LISA makes more sense tax wise than making a pension contribution as you get the identical equivalent of basic rate tax relief on your contributions and also pay no tax on any money you withdraw (from age 60).

Prior to now (as a 40% taxpayer) you were correct that a pension could offer the best tax treatment.

Here is a handy guide that also lists LISA providers:

https://www.which.co.uk/money/savings-and-isas/isa...

Cheers!

[anonymous-user]

HMRC stack your income up in a specific order. I believe "earned income" always goes on top of the stack. It is this category of your income that can be used for making tax relieved pension contributions and relief will normally be at your highest rate of tax. In other words, your earnings sit on top of your dividends.

If your total taxable income puts you in the higher rate bracket of 40% then you will still be eligible for some 40% tax relief on pension contributions.

You'd probably need an accountant to calculate exactly how much of your total income can qualify for 40% tax relief on pension contributions. I think that as long as you have an ongoing pension scheme and relevant earnings you can finesse the calculations after the end of the tax year so avoiding the need to base your numbers on estimates.