A Simple Guide to Pension Tax Relief

When you save into a pension, the government makes a contribution too. This is known as pension tax relief and is an incentive for you to save for your retirement.

All UK residents under the age of 75 qualify for pension tax relief. If you’re not earning or not earning enough to pay tax, the good news is that you can still benefit from some tax relief.

So, how much pension tax relief will you get?

The amount of tax relief you’ll receive is equal to the highest rate of income tax you pay:

  • Basic-rate taxpayers (20%) = 20% pension tax relief
  • Higher-rate taxpayers (40%) = 20% pension tax relief + an extra 20% claimed back through your tax return 
  • Additional-rate taxpayers (45%) = 20% pension tax relief + an extra 25% claimed back through your tax return

**Please note that these figures apply to England and Wales only. Pension tax relief is banded differently in Scotland.

What does pension tax relief look like in monetary terms?

Examples:

Sophie, 31. (Basic-rate tax payer)

The highest rate of income tax Sophie pays is 20%. She therefore qualifies for 20% pension tax relief. Here’s what this means for her in monetary terms:

She paysGovernment addsTotal in her Pension
£1,600£400£2,000
£3,200£800£4,000
£4,400£1,100£5,500

Dave, 45. (Higher-rate tax payer)

Dave is a higher-rate tax payer. Therefore, the highest rate of income tax he pays is 40%.

This means he qualifies for 20% tax relief plus an extra 20% claimed back through his tax return. Here’s what this could look like for him in monetary terms:

He paysGovernment addsTotal in his PensionClaim back*Total cost to him*
£8,000£2,000£10,000£2,000£6,000
£16,000£4,000£20,000£4,000£12,000
£32,000£8,000£40,000£8,000£24,000

*Must pay enough tax at 40% to claim the full amount.

Jenna, 54. (Additional-rate tax payer)

As an additional rate tax payer, the highest rate of income tax Jenna pays is 45%. She therefore qualifies for 20% pension tax relief plus an extra 25% claimed back through her tax return.

Here’s what her pension could look like if she contributed the following amounts:

She paysGovernment addsTotal in her PensionClaim back*Total cost to her*
£8,000£2,000£10,000£2,500£5,500
£16,000£4,000£20,000**£5,000£11,000
£104,000£26,000£130,000**£32,500£71,500

**Unused allowance from previous years will need to be carried forward – see below for more information. 

*Must pay enough tax at 45% to claim the full amount.

Matt, 41. Paying into a pension on behalf of his young son Oliver. (Oliver is a non-tax payer)

Matt’s son Oliver is under the age of 18 and pays 0% tax. Even though Oliver is a non-tax payer he still qualifies for pension tax relief on a contribution of up to £3,600.

This means that Matt can make pension contributions on behalf of Oliver to benefit from pension tax relief. You should note that the pension tax relief also counts towards the total contribution of £3,600.

Here’s some examples of the contributions Matt could make on behalf of Oliver and what this would mean for his pension pot:

Matt paysGovernment addsTotal in Oliver’s SIPP
£400£100£500
£1,200£300£1,500
£2,880£720£3,600

Matt may also decide to pay into the pension of a non or low earning spouse to gain tax relief. His spouse would qualify for up to as much as they earn or £3,600 if this figure is higher.

How much can you contribute?

You should of course utilise this helping hand from the Government but be aware of the following limitations:

Annual Allowance

The Annual Allowance is the maximum amount you can contribute to your pension each year, If you’re a UK resident under 75, generally you and your employer can contribute up to £40,000 each year into your pension.

You should note that the tax relief counts towards this total contribution, so you need to factor this in to the allowance. You personally cannot add more than you earn in any given tax year to your pension. As mentioned above, non tax payers can add up to £3,600 including tax relief.

Carry Forward Rules

If you haven’t used your full Annual Allowance from previous years you may be about to ‘carry it forward’ to this year.

So, if you have not used your full Annual Allowance from previous years you may be able to make a very large contribution this year, providing the amount does not go over your annual earnings.

You can do this by writing to your local tax office up to 4 years after the end of the tax year in which you didn’t make the full contribution and reclaim your extra tax relief.

The Lifetime Allowance

You should also be aware of the total pension amount you can build up during your lifetime without incurring a tax charge. The current Lifetime Allowance is £1.03m. Click here to find out more.

We hope you have found the information in this article insightful and a further incentive to save for your retirement. However, ensuring you are making the best decisions surrounding your pension can be complicated. We therefore recommend consulting an Independent Financial Adviser.  For a free consultation, call 01244 347 583 or email us at: info@innesreid.co.uk. 

DISCLAIMER – The information contained in this article is for informational purposes only and should not be taken as advice. You should consult an Independent Financial Adviser before taking action in relation to your Retirement Planning.  Figures and thresholds used in this article were true for England and Wales at the time of writing but may change in the future. Figures do not apply to Scotland. More information about Pension Tax Relief can be found on the Government’s website by clicking here. Article last reviewed – November 2019. 

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