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Contributing to a private pension explained

Tax relief on pension contributions explained

By Paul Davies

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Tax relief on pension contributions explained

Find out how the government tops up your pension savings in the form of pension tax relief, and use our pension tax relief calculator to see how much you'll get.

When you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief.

The amount of tax relief you get is based upon the income tax rate you pay. Pension tax relief sounds simple on paper, but how it works in practice can depend on how much you contribute and the kind of pension scheme you’re in.

This guide explains exactly how pension tax relief works works and what you need to do to get the most from your pension savings.

What is pension tax relief?

When you earn tax relief on your pension, some of your money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

How pension tax relief works. 

If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80. The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary.

Higher-rate (40%) and additional-rate (45%) taxpayers only need to pay £60 and £55 respectively to achieve the same £100 of pension savings.

Pensions tax relief calculator 2017/18

The amount of pension tax relief you get you get on your pension contributions depends on the top rate of income tax you pay. Our calculator gives you an idea of how much relief you’ll get on contributions.

CURRENTLY BEING UPDATED - OUR CALCULATOR WILL BE BACK VERY SOON.

How do I claim pension tax relief?

The way tax relief is claimed depends on the type of pension you are saving into, and it’s worth checking with your scheme to see what method it uses, as you might need to do some extra legwork to get the full tax relief you’re entitled to. There are two main ways:

Pension tax relief from ‘net pay’

A ‘net pay’ arrangement is used by some workplace pensions, and don’t require you to do anything to get your full tax relief.

Your pension contributions are deducted from your salary before income tax is paid on them, and your pension scheme automatically claims back tax relief at your highest rate of income tax.

Pension tax relief at source 

‘Relief at source’ applies to all personal pensions and some workplace pensions. So, if you have a private pension with an insurance company, or a self-invested personal pension (Sipp), this will apply to you.

If you’re paying into a pension through your employer, your employer will take 80% of your pension contribution from your salary (technically known as ‘net of basic rate tax relief’).

Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension.

Under this system, higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them.

  • Use the Which? tax calculator to complete your tax return and claim back pension tax relief. Tot up your tax bill, and submit it direct to HMRC. 

How much pension tax relief can I earn in 2017/18?

The government puts a limit on the amount of pension contributions on which you can earn tax relief. This is called the annual allowance. It has been set at £40,000 for the tax year 2017-18.

Any pension payments you make over the £40,000 limit will be subject to income tax at the highest rate you pay.

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

Find out more in our annual allowance guide.

What if I’m a non-taxpayer?

Non-taxpayers, including spouses who aren’t in employment and children, are eligible for tax relief of 20%, even though they don’t pay tax.

However, the maximum they can contribute is £3,600, or their total income, whichever is lower. This includes the government top-up, so your personal contribution can be no higher than £2,880.

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