Tax Relief On Pension Contributions Explained

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on January 31, 2019

Updated June 6, 2019

HMRC tax relief on pensions

Not many people know much about savings and pensions and how tax relief comes in. In fact, in a study two in five people in the UK have no idea how tax relief works. UK tax relief was set up to encourage taxpayers to save as much as possible. Tax relief on pension contributions is based on the income tax a person pays and thus one of the best tax-efficient methods of accumulating savings.

While you can boost your pension as much as you want, lifetime and annual limits will determine the amount of tax relief you receive.

Tax relief and the highest income tax rate

Tax relief is provided on a person’s pension contributions on the highest income tax rate paid. Pension tax relief of 20 per cent is offered to basic-rate taxpayers. High-rate taxpayers get pension tax relief of 40 per cent. Pension tax relief claimable by additional-rate taxpayers stands at 45 per cent.

It costs basic-rate type of taxpayer £80 contributing £100 into their pension from their salary. An additional £20 is added to basic-rate taxpayers by the government, which would have been deducted in the first place.

Additional rate taxpayers on 45% tax relief claim only require a payment of £55 to get £100 of savings on their pension while high-rate taxpayers on 40% claim only need to pay £60.

Those without earnings

For those without earnings such as the unemployed or earning £3,600 and below annually it’s possible to contribute maximum £3,600 yearly to different pensions such as stakeholder, personally invested or personal pensions. In turn, the person receives basic-rate income tax relief of 20 per cent on the amount contributed.

Excess amounts resulting after paying more than the maximum limit doesn’t attract any tax relief. In fact, if you’ve received any tax relief from the excess contributions, you need to reimburse the amount to HMRC.

Pay attention to amounts paid by your employer into the pension scheme because they don’t attract tax relief, including contributions made via salary sacrifice.

Tax relief on workplace pension

You can receive tax relief on workplace pension in various ways. One way includes your employer deducting your contributions to the pension from your salary prior to deducting tax. It means tax relief is received at the highest tax rate paid in net pay plans.

Talk to the scheme admin or check scheme booklet on your own to find if you fall into such schemes.

Another way is where the employer deducts a contribution of an employee’s net pay once tax deduction has been completed prior to paying the individual. The contribution is then sent by the employer, on the employee’s behalf, to the pension provider. As a result, the basic-rate 20 per cent tax is claimed by the pension provider and added into your pot. For instance, where an employer deducts £80 contribution from the net pay, the pension provider will make a claim of £20 to make a £100 gross contribution to your pension.

Higher-rate taxpayer? Use your self-assessment tax return to claim additional tax relief from HMRC.

Self-invested, stakeholder pension and personal pensions

For personal pension schemes, contributions to the pension will be claimed on basic-rate income tax relief basis. The pension provider makes basic-rate tax claim of 20 per cent from the HMRC, which is added into your pot.

Again, higher rate taxpayers should make additional tax relief claims from the HMRC via their self-assessment tax returns.

Third party contributions (payment by another person, not the employer)

For contribution done by another person other than the employer, such as a wife or husband, the contribution is accepted as if made by the member. As such basic-rate tax contribution net is paid by the third party. However, only the member is able to claim additional-rate, and higher rate tax relief on the total gross amount contributed.

For instance, if an individual pays £2,000 to a self-invested pension scheme and her partner pays further £2,000 yearly contribution into her plan she’ll get a £1,000 tax relief on basic-rate tax basis earning her £5,000 investment to her plan. She can also make an additional-rate tax relief claim of 20% from the £5,000 gross amount since she’s a higher rate taxpayer to get another £1,000 extra tax relief.

Those contributing into specific pension plans like retirement annuity contracts commenced before 6th April 1988 and not taken as paid on basic-rate income tax relief on net basis can make claims of all due tax relief on higher taste and basic rate relief from HMRC.

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