Pension Allowances and Tax Relief

Published / Last Updated on 17/05/2023

Pensions Tax Allowances and Relief

Pension Tax Relief

There have been a number of changes to pension tax relief over the last few years with regards 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 (20.00%) 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 £100.00 is credited to your pension fund.
  • Higher Rate (40.00%) and Additional Rate Tax Payers (45.00%)
  • 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 40.00% or 45.00% tax payer to you with a tax refund for the balance of 20% or 25% (making your total tax relief up to 40.00%/45.00%
  • 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 40.00%/45.00% 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 fund 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 £60,000.00 pa), you may face tax penalties.

See Pension Annual Allowance: Annual Allowance

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 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

For pension advice and help with tax returns for pensions: contact us.

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