What are pension tax breaks?

Pensions are a tax efficient way to save for retirement. To encourage you to save, you get tax breaks on contributions you make to your pension. These are normally at the highest rate of income tax that you pay.

The following information is based on the tax position for England, Wales and Northern Ireland. Different tax rates and bands apply to Scottish residents.

 

How do pension tax breaks work?

For many schemes, you get a 25% boost to your payments in the form of an automatic top up from the taxman for basic rate tax relief.

For example, to get £100 into your pension, you actually pay £80 and the taxman adds a further £20 (25% of the £80 you've paid). For these types of scheme, higher or additional rate taxpayers can normally claim any extra tax relief due through their self-assessment tax return or by contacting HMRC.

 

To invest £100 in a pension

Basic rate taxpayer

You pay £80

Costs you £80

Basic rate tax relief added £20

Higher rate taxpayer

You pay £80

Costs you £60

Basic rate tax relief added £20

You claim extra relief £20

Additional rate taxpayer

You pay £80

Costs you £55

Basic rate tax relief added £20

You claim extra relief £25

However, not all schemes operate tax relief this way. With some schemes, nothing is added to your pension by the taxman. Instead, your £100 contribution is taken from your salary before tax is calculated. This means you get all your tax relief immediately, and there's no need to claim anything extra if you're a higher or additional rate tax payer.

With some old schemes, you have to claim all tax relief due through your self-assessment tax return or by contacting HMRC.

How much can I pay?

What you can personally pay into your pension is limited by how much you earn. If you don’t have any earnings, the most you can pay in will be £3,600.

However, you also have to consider the annual allowance, normally £40,000 each tax year. That’s the amount you or your employer can pay in total to your pension each tax year without tax charges.

But higher payments may be possible if you have any unused allowances from the previous three tax years.

If your total income, plus the value of any employer payments, is more than £150,000, your annual allowance could be reduced to as little as £10,000.

You could still retain the full £40,000 allowance if your total income, less your own personal contributions, is £110,000 or below.

Read our guide: Managing your pension annual allowance.

4 tips to maximise your pension tax relief

1. Pay more now

If you are a paying tax at a higher rate than you would normally pay, consider paying more in to your pension to benefit from tax breaks.

Of course, your pension is invested and can go down as well as up and you could get back less than you paid in.

2. Claim any higher rate tax relief in your tax return

If you make a contribution into your pension, your provider will normally add basic rate tax relief.

If you’re a higher or additional rate taxpayer, you can claim the additional tax relief you’re entitled to in your self-assessment. If you forgot to claim the extra relief in the past, you can still claim relief for the previous three tax years.

Some pensions take your contribution from your pay before any tax is deducted. This means you get any basic, higher and additional rate tax relief immediately and don’t need to claim any extra relief in your self-assessment.

3. Boost your pension with your ISA

From age 55 you have unrestricted access to your pension savings. If you're 55 or over, you may want to think about moving your ISA into your pension to enjoy tax relief on your savings.

What's more, unlike your ISA, your pension pot is generally outside your estate for inheritance tax. But you may want to think about doing this while you are still working because tax relief on your payments is limited by your earnings. If you have no earnings, you can still pay £3,600 a year into your pension.


Before making any decisions, it’s important to consider whether this approach is right for you and your individual circumstances. If you need to access savings before age 55, keeping it in an ISA may be a better solution.

4. Recover child benefit or personal allowance

A pension contribution could help some people retain their child benefit or personal allowance. Pension contributions reduce an individual's taxable income. In turn, this can have a positive effect on both the personal allowance and child benefit for higher earners resulting in a lower tax bill.


You may begin to lose child benefit if one family member earns more than £50,000. Making a contribution to bring your income back down to below £50,000 a year can be a useful way to retain your child benefit and you’ll receive tax relief on your pension contributions too.


Similarly, you begin to lose your personal allowance once your income goes above £100,000. Making a contribution to bring your income down to £100,000 or below can restore your personal allowance

 

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The value of investments can go down as well as up. It’s possible they may be worth less than was invested.

Remember, tax rules and legislation can change and the value of tax benefits depends on your individual circumstances. This information is based on our understanding in April 2018.

Access to impartial guidance

We recommend you seek appropriate guidance or advice before you make any decisions. An adviser may charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension - it’s time to choose

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