Personal v Workplace Pension Lump Sum Contributions
Published / Last Updated on 21/03/2023
Private or Personal Pension Lump Sums
When you contribute to a private pension scheme, you usually pay a net contribution, and the pension provider will make up the 20% basic rate tax relief at source and then claim this relief from HMRC every quarter. If there is further tax relief to be claimed if you are a higher rate taxpayer (40%) or an additional rate taxpayer (45%) you get the higher ‘marginal’ rate relief via self assessment tax return or a letter to HMRC proving that you have personally paid a pension contribution. The following example demonstrates:
You personally pay in £800 as a lump sum to your personal pension plan to achieve £1,000 in pension fund.
- Pension provider adds £200 basic rate relief (20%) to your pension fund. Total now in pension fund = £1,000.
- If you are Basic Rate Taxpayer (20%), you have received your full tax relief of 20%.
- If you are a Higher Rate Taxpayer (40%), a further £200 (20%) is due back to you as a tax refund via self assessment. Total net paid in £600 (£800 less £200 tax refund). Total in pension fund £1,000. You have now received 40% tax relief.
- If you are an Additional Rate Taxpayer (45%), a further £250 (25%) is due back to you as a tax refund via self assessment. Total net paid in £550 (£800 less £250 tax refund). Total in pension fund £1,000. You have now received 45% tax relief.
Workplace Pension Lump Sums
The problem comes with many workplace pension providers as they usually operate on a ‘net pay’ arrangement. This means, your regular, monthly pension contribution is deducted from your gross pay (i.e., before any tax has been calculated) meaning that you pay income tax on your gross salary less the pension contribution. You pay income tax on a lower amount, meaning you have already had full tax relief on your pension contribution via payroll and therefore, your pension contribution is paid gross by your employer across to your workplace pension.
If you personally wish to then make an additional lump £1,000 gross to your workplace pension, they only accept the gross amount. You personally must pay in £1,000 as a lump sum to your personal pension plan to achieve £1,000 in pension fund.
- If you are Basic Rate Taxpayer (20%), you have not yet received your tax relief of 20%. £200 (20%) is due back to you as a tax refund via self assessment. Total gross paid in £1,000 less £200 tax refund = £800. Total in pension fund £1,000. You have now received 20% tax relief.
- If you are a Higher Rate Taxpayer (40%), you have not yet received your tax relief of 40%. £400 (40%) is due back to you as a tax refund via self assessment. Total gross paid in £1,000 less £400 tax refund = £600. Total in pension fund £1,000. You have now received 40% tax relief.
- If you are an Additional Rate Taxpayer (455) you have not yet received your tax relief of 50%. £450 (45%) is due back to you as a tax refund via self assessment. Total gross paid in £1,000 less £450 tax refund = £550. Total in pension fund £1,000. You have now received 45% tax relief.
When making lump sum single pension contributions to your workplace pension, always check whether they require you to make a gross or net pension contribution.
