Tax relief on pension contributions
The government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief reduces your tax bill or increases your pension fund.
How tax relief on pension contributions works
The way you get tax relief on pension contributions depends on whether you pay into an occupational, public service or personal pension scheme.
Workplace or public service pension schemes
Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what's left. So whether you pay tax at basic or higher or additional rate you get the full relief straightaway.
However, some employers use the same method of paying pension contributions that personal pension scheme payers use - read more in the section on 'personal pensions'.
If you're a GP or dentist and contribute to a public service scheme, you are taxed as self-employed for part of your earnings so should claim tax relief through your Self Assessment tax return.
You pay Income Tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension. If you pay tax at higher rate, you can claim the difference through your tax return or by telephoning or writing to your Tax Office. If you’re an additional rate taxpayer you’ll have to claim the difference through your tax return.
Unlike personal pension providers, most retirement annuity providers - personal pension schemes set up before July 1988 - don't offer a 'relief at source' scheme whereby they claim back tax at the basic rate. Instead you'll need to claim the tax relief you're due through your tax return, or if you don't complete a tax return by telephoning or writing to your tax office.
Effect of pension contributions on age-related allowances
If you receive an age-related Personal Allowance or Married Couple's Allowance, HMRC will subtract the amount you contribute plus the basic rate tax from your total income and use the reduced figure to work out the value of your allowances. This may have the effect of increasing these allowances if your income was above the relevant 'income limit' that applies.
There are limits on how much tax relief you can get - read more in the section below 'Limits on tax relief'.
- Married couple's allowance - includes civil partnerships (HMRC website)
- Personal allowance (HMRC website)
What happens if you don't pay tax?
If you don't pay tax, you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600.
There is no tax relief for contributions above this amount.
Tax relief if you put money into someone else's pension scheme
You can put money into someone else's personal pension - like your husband, wife, civil partner, child or grandchild's. They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill. If they've got no income, you can pay in up to £2,880 a year - which becomes £3,600 with tax relief.
If the pension scheme rules allow it, you may also be able to put money into someone else's workplace or public service scheme. You'll not get tax relief on your contribution, but the other person can get relief either through their tax return or by making a claim to HMRC by telephone or letter.
Limits on tax relief
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'.
The annual allowance amounts for the current and previous years are shown below.
Limits on tax relief - annual allowance amount:
|Tax year||Annual Allowance|
You pay tax on any contributions you make that are above the annual allowance. Find out how the annual allowance affects you, including when you can carry forward unused allowances from a previous tax year and how to work out the tax due on amounts above the limit, by following the second link below.
If your income is £130,000 or more – special rules for 2009-2010 and 2010-2011
From April 2009 a ‘special annual allowance’ was introduced to stop people making large additional pension contributions and getting higher rates of tax relief on them ahead of a reduction to the amount of tax relief given on pension savings made from April 2011 onwards.
The special annual allowance affect you if all of the following apply:
- your total pension savings – including employer contributions - are more than £20,000
- you changed the amount you normally save towards your pension – on or after 22 April 2009 or on or after 9 December 2009, depending on your circumstances
- your income is £130,000 or more in the relevant tax year or either of the two previous tax years
Your special annual allowance is normally £20,000 less your normal pension savings. You have to include any amount by which your pension savings have gone over your special annual allowance.
Other tax advantages of pensions
The pension fund doesn't pay tax on any capital gains or investment income.
Also, when your pension matures you can take up to 25 per cent of it as a tax-free lump sum, provided your pension scheme rules allow it, and your total savings are within the 'lifetime allowance' for the year in which you take your benefit.
The lifetime allowance amounts for the current and previous years are shown below.
Lifetime allowance amounts
|Tax year||Lifetime allowance|
Lump sums or income drawn from savings above the lifetime allowance will be subject to tax charges - read the article 'Pension rules from April 2006' for details.
Repaying tax if your pension contributions are refunded
You can usually only get your pension contributions refunded if you withdraw from a workplace or public service scheme within two years of starting payments. Certain events might shorten the time limit. For refunds made up to the end of the 2009-2010 tax year, tax is deducted at 20 per cent for refunds of up to £10,800 and at 40 per cent on any excess above this.
For refunds made in the 2010-2011 tax year and later years, tax is deducted at 20 per cent for refunds of up to £20,000 and at 50 per cent on any excess above this. The scheme administrator deducts the tax before making the refund.