Introduction to Pension Tax Relief
Published / Last Updated on 24/10/2023
Many people may be aware that when you and your employer pay into a pension scheme, you get tax relief on the contributions made. The way tax relief is granted differs if you are dealing with private, personal pension schemes to workplace/company pension schemes.
Tax Relief on Private/Personal Pensions
- Each time you personally pay into a private scheme, 20% (basic rate) tax relief is granted at source. E.g., You pay in £80pm and your pension company automatically make this up to £100 (20% basic rate tax relief has been added).
- If you are a 40% (high rate) or a 45% (additional rate) taxpayer, you still pay in £80pm into your pension and your pension company automatically make this up to £100 (20% basic rate tax relief has been added). In addition, a 40% taxpayer is still due 20% additional tax relief and a 45% taxpayer is due an additional 25% tax relief. The additional tax relief due is usually issued by means of a refund from HMRC as part of your self assessment tax return.
- Sometimes, but rarely, HMRC will issue you a higher tax code to recover the additional tax relief but usually for most people it will be a tax refund via self assessment.
- Company/Employer contributions to your private/personal pension are usually paid gross and your employer will offset these against corporation tax (Ltd Company) and income tax (if self employed/partnership).
Tax Relief on Workplace/Company Pensions
- Employee pension contributions are usually deducted from your gross pay and then the Net pay amount is then subject to income tax meaning you get tax relief via your payslip.
- E.g., you earn £1,000 pm with an employee pension of £100pm gross. Your payslip shows £1,000 less £100 = £900. £900 is then subject to income tax and not £1,000.
- Whether you are a basic rate (20%, higher rate (40%) or additional rate (45%) taxpayer, you have received all your tax relief on the contribution via payroll.
- Company/Employer contributions to your company/workplace pension are usually paid gross and your employer will offset these against corporation tax (Ltd Company) and income tax (if self employed/partnership).
Other Things to Be Aware of on Tax Relief:
Pension Annual Allowance: The maximum you and your employer can pay into a pension is the lower of £60,000 pa and your salary e.g., if you earn £80,000 pa, the maximum that can be paid into pensions is £60,000 pa and if you earn £40,000 pa, the maximum that be paid into pensions in £40,000 pa.
See: AA & LTA
Money Purchase Annual Allowance: If you have already cashed some of your pension funds via flexible drawdown, 25% is tax free and the remaining 75% is taxable. If you have drawn down some of the taxable part (75%) the maximum you can then pay in each year in new pension contributions is capped at £10,000 pa.
See: MPAA
Tapered Annual Allowance: If you are a high earner. For every £2 you earn over £260,000 (known an Threshold Income), your pension annual allowance (£60,000) is reduced by £1. E.g., you earn £300,000 pa. This is £40,000 over threshold income. Every £2, reduces annual allowance by £1. Therefore, at £40,000 over, on 2:1 basis, your annual allowance is reduced by £20,000 from £60,000 to £40,000 pa. This is a tapered annual allowance. The minimum tapered annual allowance is £10,000 pa. Therefore, if you earn £360,000 (£100,000 over threshold income), on 2:1 that £50,000 reduction in annual allowance down from £60,000 pa to £10,000 pa.
See: MTAA
Carry Forward: Provided you use up this year’s annual allowance, you are allowed to carry forward the previous 3 years unused annual allowances. This may mean you can pay in more than £60,000 into a pension scheme and get relief at 40% and even 45%.
See: Carry Forward
