Tax relief on pension contributions

Pensions provide a number of tax benefits, with one of the key ones being tax relief on your contributions. When you pay into your pension, some of the money that would have gone to the government as tax goes towards your pension instead. This can help reduce the amount of tax you pay and be used to help boost your savings for the future.

How does pension tax relief work?

When you add a personal contribution to your pension, basic rate tax relief is claimed from the government by your pension provider. For example, a payment of £800 gets £200 added in tax relief to make a gross contribution of £1,000.

This applies even for non-taxpayers, who get basic rate tax relief even though they don’t pay tax.

For higher rate or additional rate taxpayers, basic rate tax relief is still claimed by your pension provider, but you can then reclaim further tax relief through your tax return or direct from HMRC. For example, a higher rate taxpayer making a payment of £800 gets the same £200 added in tax relief to make a gross contribution of £1,000, but can then reclaim a further £200 back. The £1,000 in the pension pot therefore effectively only costs £600.

What are the limits?

There is no limit on the amount that can be saved into your pensions each tax year. However, there are limits on the amount that can be saved each year with tax relief applying:

• Any contributions made by you or someone else on your behalf must be equal to or less than your relevant UK earnings for the tax year in which they are made. For example, a self-employed individual with a net profit of £30,000 could add £24,000 to their pension, with £6,000 added in tax relief to make a gross contribution of £30,000.

• “Relevant earnings” generally means your earned income for that tax year and excludes things like rental income or income from a pension.

• An individual with no relevant earnings can still make a pension contribution of £2,880 (with £720 added in tax relief to make a gross contribution of £3,600).

• There is an overall annual allowance, which was increased in April 2024 to £60,000. It may be possible to carry forward unused allowance from the three previous tax years, bearing in mind the allowance was previously set at £40,000.

• The annual allowance can be reduced to £10,000 for higher earners, or those who have already flexibly accessed a pension.

• Exceeding these limits means a tax charge is likely to apply.

Please note that different tax rates and allowances apply in Scotland.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028).

This article is for information only and should not be construed as advice or a recommendation. You should always seek independent financial advice prior to taking any action.

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