Leading advisory firm Killik & Co suggests that the 23 million basic rate taxpayers in the UK should consider making a pension contribution before 5 April 2008 to take advantage of the 22 per cent tax relief, before the rate is reduced to 20 per cent in the next tax year.

Currently, a basic rate taxpayer making a £100 contribution into a pension pays £78 and Her Majesty’s Revenue and Customs contributes a further £22 in tax relief.

If the contribution is delayed until after 5 April then that £100 will cost the individual £80 – an extra £2.

Malcolm Cuthbert, managing director of financial planning at Killik & Co, explains, ‘This is a no-brainer, any basic rate taxpayer thinking of making a pension contribution – particularly a lump sum – could save 2p in the pound by investing before the April deadline.

‘By acting now, basic rate taxpayers will generate a return on investment of 38.2 per cent, compared to 25 per cent next tax year, and higher rate taxpayers will continue to generate 51 per cent.’

Both higher and lower rate tax payers automatically receive tax relief up to the basic rate of tax, whereas higher rate tax payers must claim the additional relief through their tax return.

While the higher rate of relief remains unchanged at 40 per cent minus 22 per cent basic plus 18 per cent higher in 07/08, compared to 20 per cent basic plus 20 per cent higher in 08/09 – it still makes sense for the 3.7 million UK higher rate tax payers to make a pension contribution now to take advantage of the additional two per cent relief at source.

Delaying a contribution until next year will mean that the two per cent relief will have to be claimed through a 2008/09 tax return – tying up the cash until January 2010.

On a lump sum equivalent to £15,000 paid into a pension on 6 April 2008, this would mean forgoing £300 (two per cent) – and the opportunity to earn interest on that money – until 2010, compared to yielding interest of £25 if you make the contribution now.