Pensions Tax Allowances and Relief:
- Pension Lifetime Allowance 2016
- Pension Lifetime Allowance 2014
- Pension Lifetime Allowance 2012
- Pension Annual Allowance 2011 to 2014
- Tax Relief 2006 to 2011
- Pre April 2006 Rules
There have been a number of changes to pension tax relief over the last few years with regard to capping how much you can pay into pensions and tax relief that is offered.
- Individual Pension Payments: Tax relief on contributions is given at your highest rate of tax paid.
- Employer and Company contributions: tax relief is given against corporation tax if you are a limited company and again personal tax if you are
Private Pension Scheme Tax Relief - e.g. Personal Pensions, Stakeholder Pensions
- Basic Rate Tax Relief (20%) is offered instantly as soon as you pay a pension contribution. Your pension company instantly credits you with the tax relief and reclaims this from HMRC.
- Example: You pay £80 net. Your pension account is instantly credited with £80 plus £20 in tax relief. This means a gross contribution of £100 is credited to your pension fund.
- Higher Rate (40%) and Additional Rate Tax Payers (45%)
- As in the example above, you pay £80 and your pension is credited automatically with £20 basic rate tax relief.
- When you complete a self assessment return, you advise HMRC of the total payments that you have made to pension schemes in that tax year. HMRC then grants the additional tax relief as a 40% or 45% tax payer to you with a tax refund for the balance of 20% or 25% (making your total tax relief up to 40%/45%
- Example: You have paid £80, £20 relief has been added by the pension company automatically. You then receive a further tax rebate/refund of £20/£25 taking your total tax relief up to 40%/45% respectively.
- Company Contributions to Private Pensions can be made by your employer/company
- The employer is allowed to offset those payments against their tax liability directly.
- It is an expense of the business meaning it is offset against corporation tax if a limited company or employers personal tax if they are self employed or a partnership.
- Pension contributions by your employer are not treated as a benefit in kind for you. This means you do not pay tax on what they have paid in (unless total contributions in a tax year exceed the pensions annual allowance, nor do you or your employer pay additional National Insurance Contributions for pension payments like you do on your normal pay.
Is there a limit to how much tax relief you can receive?
All pension funds contributions are limited to the annual allowance i.e. if you or your employer or a combination of the two pay in too much (currently £40,000), you face tax penalties.
- Non tax payers: Just because you are paying no income tax, you can still pay into a pension fund up to £3,600 gross per annum. In simple terms, you can pay up to £2,808 per year net and with 20% tax relief automatically collecting by the pension company your pension fund is grossed up by 20% to £3,600 even though you have paid no tax.
- Basic Rate Taxpayers: The maximum you can pay into a pension scheme each year is usually limited to your salary earned. This means you can get tax relief up to the maximum of your whole salary i.e. reclaim all the tax paid.
- Higher Rate Tax Payers/Additional Rate Taxpayers: The level of gross earnings at which Higher Rate Tax starts in the tax year 2014 was £41,450. For example: You earn £51,450pa. In 2014, this mean't that £10,000 of your earnings is over the basic rate tax threshold and taxed at 40%. If you personally make pension contributions of £15,000. Higher rate tax relief will only be granted on the proportion of earnings that you actually paid higher rate tax on. In this example, £10,000 pension payments will be tax relieved at 40% and the balance of £5,000 is tax relieved at 20%. This works in exactly the same way for Additional Rate Tax payable for earnings in excess of £150,000.
Company Pension Scheme Tax Relief
- Many company pension schemes collect your own private contributions to the pension scheme from your pay by payroll deduction.
- Gross Pay: Your contributions are deducted from your gross pay in your payslip before any tax is calculated on your earnings. This means that you instantly receive tax relief by technically reducing the amount you earned that month and the tax you pay. If you pay £100 via Gross Pay Deduction, £100 is credited to your pension. There is no additional 20% or higher rate tax refund that has to be worked out as you instantly got tax relief by having a lower salary that month and paying less tax.
- This means the above net and gross calculations for private pensions and tax refunds are not required.
- Net Pay: Some employers, but is is very rare for this to happen, deduct pension contributions from your pay after tax. This means that you would still have to secure tax relief much in the same way as private pensions.
- As for private pensions, employer contributions are allowed as a business expense and neither you nor your employer have an additional tax or national insurance liability unless the annual allowance limit is exceeded