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Individual pension contributions

Introduction

This briefing sets out the points to consider for individuals making personal contributions to pensions, including eligibility, limitations and how tax relief is given.
 

Core considerations  

  • A relevant UK individual can contribute an unlimited amount to their UK registered pension scheme.   
    
  • A contribution will usually qualify for tax relief if the person is under age 75 and the contribution does not exceed £3,600 or their net relevant earnings for the tax year if higher. 
  • Tax relief is provided in different ways depending on the type of pension scheme the contribution is being invested in.
  • Contributions must, generally, be paid as cash sums. In limited circumstances tax rules allow a contribution of shares. It may also be possible that an asset (such as property or shares) from outside a pension scheme is transferred into the pension scheme instead of selling it beforehand (known as an in-specie contribution).
  • Even if tax relief is granted it is possible that an annual allowance tax charge could apply. This tax charge effectively removes the advanage of any tax relief given.
  • Where an individual has pension benefits that already exceed their lifetime allowance, additional contributions will not generate further tax-free pension benefits. Additional contributions would generate pension benefits fully taxable against the individual.

Contents


A relevant UK individual

A relevant UK individual can contribute to a UK registered pension scheme and is generally someone who has UK earnings subject to income tax and is resident in the UK for some or all of the tax year that the contribution is being paid. Someone who was resident in the UK at some time in the five tax years immediately before the year in question and they were resident in the UK when they joined the pension scheme can also be treated as a relevant UK individual, as can a person who has earnings from overseas Crown employment.  A spouse or civil partner of a Crown employee also qualifies.    


£3,600 - the basic amount

Irrespective of their level of net relevant earnings anyone can pay this amount into a pension and receive tax relief. So, someone with no income at all could pay £2,880 into a personal pension, receive £720 (20%) as tax relief claimed by the provider, and have £3,600 in total invested into a pension for their benefit. Someone who does not pay any income tax can only obtain tax relief through this method (known as ‘relief at source’ – see below for more information). 


Relevant UK earnings

These include employment income such as salary, wages, bonus, overtime or commission and self-employed or partnership income. Also included is income from a furnished holiday lettings business, certain patent income, profit related pay, statutory sick pay or statutory maternity pay and any part of a redundancy payment that exceeds the £30,000 tax exempt threshold. It does not include income from pensions or dividends or tax deferred withdrawals from investment bonds. HMRC’s Pensions Tax Manual PTM044100 sets out full details.    

Tax relief is provided in three different ways: relief at source, net pay and by claiming through an HMRC self-assessment tax return.  


Tax relief at source

A person that pays a contribution is treated by the pension provider as having paid it net of basic rate tax. The pension provider then claims the basic rate tax amount from HMRC and invests it into the pension. So, if someone wants to invest a contribution of £1,000, they pay £800 and the provider claims £200 as tax relief giving a total of £1,000 invested. Note that whilst the Scottish basic rate of income tax is 21%, only 20% is reclaimed currently by the pension provider – the individual must claim the remaining 1% themselves through self-assessment in the same way that a higher rate income tax payer needs to claim their additional tax relief. Even if someone pays no income tax at all (say an individual earning less than the personal allowance) they can still receive tax relief at source this way. Relief at source usually applies to contributions made to personal pensions, including self-invested personal pensions (SIPPs) and potentially grouped personal pensions (depending on how they are set up). 


Tax relief through net pay arrangements

These can be used by an employer’s occupational pension schemes or grouped personal pensions set up under a separate trust by an employer. In these circumstances the contribution is deducted from gross pay, before tax is deducted, and then passed on to the scheme administrator. So, if someone is a higher rate tax payer and wants to pay £1,000 to their pension, £1,000 is taken out of their gross pay so they don’t pay the £400 income tax that they would normally pay on it (assuming all of this income would have been taxed at 40%). Unlike relief at source, it means that a higher rate tax payer will get tax relief immediately but a non-tax payer will get no tax relief. 
 

Tax relief through a self-assessment tax return

This is the method of tax relief where either none has been given already (this is quite rare) or where additional tax relief needs to be claimed (relief at source given but eligible for additional tax relief). Tax relief generally won’t be given under relief at source or net pay for someone who is making contributions to an old-style, pre-July 1988, retirement annuity (or Section 226) contract or a GP/dentist with self-employed income paying into the NHS pension scheme, so these are individuals who will need to claim for the full tax relief through self-assessment. 
 

Methods of payment - cash, shares and in-specie

Generally, contributions must be paid as cash sums, such as a deduction from a member’s salary, cheques, bank or building society drafts, direct debits, standing orders, faster payments and debit/credit cards. 

A contribution of shares is allowed in limited circumstances. These shares must be shares which the person acquired on exercising a right under a SAYE option scheme or were awarded under the terms of a share incentive plan.  

An in-specie contribution is where, in certain circumstances an asset (such as property or shares) from outside a pension scheme is transferred into the pension scheme instead of selling it beforehand. This is relatively uncommon and only a few companies are willing to accept contributions on this basis. A long running court case (HMRC v Sippchoice Limited) considered when tax relief would (nor would not) be given on an in-specie contribution. Following the Upper Tribunal’s decision in this case in December 2020, HMRC’s guidance PTM42100 (Giving effect to cash contributions) was amended in December 2020 and sets out HMRC’s expectations of the process that should be followed in these circumstances for tax relief to be granted.      


Contributions with lifetime allowance protections

From 6 April 2023, anyone that applied for Enhanced Protection or Fixed Protection (2012, 2014 or 2016) before 15 March 2023 can now make pension contributions without losing their transitional protection. 

Anyone with one of these transitional protections applied for on or after 15 March 2023 would lose that protection if they made further pension contributions.  

Anyone who holds Primary Protection or Individual Protection (2014 or 2016) can already make pension contributions without losing their protection.  


Example of tax relief at source:

Kevin has always lived and worked in England and has recently been made redundant from a construction company. In this part tax year he has received £8,000 in wages, £1,000 in overtime and £45,000 as a redundancy payment – he has no other income. He wants to pay £10,000 into a SIPP to top up his pension savings in addition to the £500 he has already paid himself to his employer’s occupational pension scheme this tax year.

Kevin’s net relevant earnings this tax year so far are £24,000 (£8,000 + £1,000 plus £15,000 of the redundancy payment in excess of the £30,000 non-taxable element) so he has sufficient net relevant earnings for the £10,000 contribution to be eligible for tax relief (relievable) even when taking into account what he has already paid himself to pensions this tax year.

Kevin will receive relief at source through his SIPP provider so he will pay £8,000 with the provider claiming the remaining £2,000. Kevin’s income is in the basic rate tax band so he has no entitlement to additional tax relief. If he starts work again this tax year it may be that his new income added to what he has already received takes him into the higher rate tax band and he could then claim additional tax relief through his self-assessment tax return.


Advisers should also check there is sufficient annual allowance to make the contribution and be sure that the advantage of tax relief is not removed by a tax charge.
 
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