Here’s our straightforward guide to how pension tax relief works, and how it can add a little bit of ‘magic’ to help you save more for your future.
The benefits of tax relief explained
When we asked people last year what they knew about pensions and savings, four in ten didn’t know about tax relief.
Set up to encourage people to save more, most UK taxpayers get tax relief on their pension contributions based on the rate of income tax they pay.
In a nutshell, it’s what makes pensions such a tax-efficient way to save.
Basic-rate taxpayers who pay 20% income tax, get tax relief at the same rate. If you are a higher-rate taxpayer you get 40% tax relief, and as an additional-rate taxpayer, you get 45%.
We crunch the numbers…
It’s probably easier to think of it in simple money terms: for every £100 saved into your pension, tax relief means the cost to you is only £80 if you’re a basic-rate taxpayer, £60 if you are a higher-rate taxpayer and £55 as an additional-rate taxpayer.
While income tax is slightly different in Scotland, which you can read more on here, the effect on your pension contributions is broadly the same.
You can find out more on income tax at Gov.uk
How tax relief works – make the most of it
For most types of pension, you automatically get tax relief as a basic-rate taxpayer. Pay tax at the higher rate or additional rate, and you might need to claim back anything above the basic rate direct from HMRC.
Just make sure you claim that extra 20 or 25%; if you add it to your pension, while nothing is guaranteed, it could really make a difference.
Some workplace pensions take your contribution from your salary before you pay tax. In this case, your tax relief is automatic and you don’t have to contact HMRC. Check with your employer if you’re not sure this applies to you.
How much you can benefit
You usually get tax relief on pension contributions of up to 100% of what you earn, or £40,000 in each tax year (which runs from 6 April-5 April), whichever is lower. This is your annual allowance.
If you’re on a higher income of £150,000 or upwards, you might not be able to save as much tax efficiently. It’s worth talking this through with your adviser, or find out more from the Pensions Advisory Service, or on our website.
Make the most of your allowances
When it comes to tax relief, the good news is that if you haven’t used all your pension allowances in the past, you can still claim for anything you haven’t fully used over the previous three tax years as well as the current one – and that can add up.
What to consider if you’re still working and taking your pension savings
As more people take some of their pension savings from the age of 55 and keep working, it’s worth knowing about a recent tax change.
When you take a flexible income from your pension but keep saving, you might get a smaller annual allowance of £4,000, not £40,000 – and you can’t back-claim any unused allowances.
To find out more, read our online guide to making the most of your pension tax relief.
You can find out more on our website or try the Which pension tax relief calculator. It shows you how much tax relief you get, based on your pension contributions.
A pension is an investment and its value can go down as well as up and may be worth less than was paid in.
Laws and tax rules may change in the future. The information here is based on our understanding in May 2018 and shouldn’t be taken as financial advice. Personal circumstances also have an impact on tax treatment.