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
Tax Relief on Workplace/Company Pensions
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.
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.
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