What is pension tax relief?

13.07.2021
Ricky Banham
Financial Planning

Pension tax relief can seem like an alien concept, but it pays to understand what it is and how you can make the most of it, up to certain limits.

Pension tax relief is one of the major benefits of saving into a pension. Each time you contribute to your pension, the government does too. This form of ‘top-up’ comes by the way of tax relief. Everyone, whether you are working or not, is entitled to basic rate tax relief at a rate of 20% from the government when you make contributions to your pension.

What are the benefits?

One of the many benefits in saving into a pension is the government boosts your contributions through tax relief. The amount of tax relief is calculated at your highest marginal rate of income tax. The tax relief you can receive, depends on your income tax rate.

For a basic rate taxpayer this means you will receive an extra 20% on your eligible contributions.

If you are a higher rate taxpayer its 40%, and 45%, if you are an additional rate taxpayer.

How does this all work then?

How it works is that 20% is added ‘at source’, which means it is done automatically for you when you pay into your pension. If you are a higher, or additional rate taxpayer, then you will still receive 20% at source, but you will be able to reclaim the additional tax relief back through your tax return.

If you are a basic rate taxpayer and wanted to make a gross contribution of £100.00 (for example), then the net cost to you would be £80.00 - receiving £20.00 tax relief at source. For higher rate taxpayers, you still pay £80.00, receiving £20.00 tax relief at source, and then claim the further £20.00 through your tax return, so that the net cost is effectively £60.00.

When will I receive my tax relief?

You will automatically get the 20% basic rate tax relief if:

1.      You are part of a workplace pension where your pension contributions are deducted from your pay before income tax – this means that you receive the tax relief, there and then. This is known as a ‘net pay’ arrangement.

2.      Your pension provider claims the 20% tax relief on your behalf and adds this to your pension pot - this is known as the ‘relief-at-source’ arrangement. All personal pensions, and some workplace pensions, adopt the relief-at-source method.

Please note tax-relief is not available beyond the age of 75.

How do I claim additional pension tax relief?

If you are a higher rate, or additional rate taxpayer, then you will be able to reclaim your further tax relief on your pension contributions through your annual tax return.

Tax relief is dependent on individual circumstances.

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