Pensions are one of the most tax-efficient ways to save for your future. To encourage you to save, you get tax breaks on contributions you make to your pension - normally at the highest rate of income tax that you pay:

  • 20% for basic-rate taxpayers
  • 40% for higher-rate taxpayers
  • 45% for additional-rate taxpayers.

The information in this guide is based on tax in England, Wales and Northern Ireland in January 2019. Tax rates differ in Scotland. Your own circumstances and where you live in the UK will have an impact on your tax treatment.

Understanding how pension tax relief works

With many pensions, you get an automatic top-up from HM Revenue and Customs (HMRC) for basic rate tax relief.

So, to get £100 into your pension, you pay £80 and the tax relief adds £20. Higher or additional rate taxpayers can normally claim any extra tax relief due through their self-assessment tax return, or by contacting HMRC.

 

Making a £100 pension contribution

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

Not all pensions work this way when it comes to tax relief.

For some workplace pensions, your £100 contribution is taken from your salary before tax is calculated. You get all your tax relief immediately and there’s no need to claim anything extra, even if you’re a higher or additional rate tax payer.

How much can I pay into my pension and get tax relief?

  • Tax relief on your contributions is normally limited to 100% of your earnings. But even if you don’t have any earnings, you can still pay up to £2,880 a year, which is topped up to £3,600 with tax relief.
  • You also have to consider the annual allowance, which is normally £40,000 each tax year. That’s how much you or your employer can pay in total to your pension each tax year without tax charges. Higher contributions may be possible if you have unused annual allowance from the previous three tax years.
  • If your total income, including any employer payments, is more than £150,000, you may get a reduced annual allowance.
  • If you take more than your tax free cash from your pension, the amount in total that you and your employer can pay into your pension, without tax charges, may be limited to £4,000. This is the Money Purchase Annual Allowance.
  • Read our guide to managing your pension annual allowance
  • If you're unsure about tax, talk with your adviser. If you don't have one, find out about financial planning from Standard Life.

Five ways to maximise your pension tax relief

1. Pay more in now

If you're paying income tax at a higher rate than you would normally pay, consider paying more into your pension to benefit from tax relief. This could reduce your tax bill and grow your retirement savings pot quicker.

Remember, your pension is an investment and can go down as well as up and you could get back less than was paid in.

2. Remember to claim any extra tax relief in your tax return

Don’t forget to claim any extra tax relief you’re entitled to in your self-assessment tax return. If you have forgotten to claim relief in the past, you have up to four years to do so. You need to contact HMRC.

3. Boost your pension with your ISA, bonus or other savings

If you have an ISA, bonus or other savings, you may want to think about moving them into your pension to get the benefit of tax relief. Do consider whether this is right for your circumstances and think about taking financial advice.

You may want to think about doing this while you are still working because tax relief is limited by your earnings. Even if you have no earnings, you can still pay up to £2,880 a year, which is topped up to £3,600 with tax relief.

Unlike your ISA, pension savings are usually outside your estate for inheritance tax purposes.

If you are under the age of 55 and need access to the money, keeping it in the ISA may be a better idea.

4. Keep your child benefit

When you or your partner earns more than £50,000, you normally have to pay back some or all of any child benefit through the High Income Child Benefit Tax Charge.

Making a pension contribution to reduce your income could help you keep some or all of your child benefit - and boost your pension saving at the same time.

5. Get your personal allowance back

You begin to lose your tax-free personal allowance by £1 for every £2 if your income goes above £100,000.

Making a pension contribution can reduce your income and get back some or all of your personal, tax-free allowance, effectively resulting in a lower tax bill.

You’ll also get tax relief on your contributions.

Make your pension work harder today

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Personal and workplace pensions are an investment, the value can go down as well as up and you could get back less than you paid in.

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 February 2019 Some of the suggestions in this guide will not be right for everyone and you need to consider all the facts before making any decision.

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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