UK Pension Tax Relief
One of the most attractive features of saving for your retirement using a UK Personal Pension is the benefit of tax relief on the contributions that you make.
In this article, we will cover the main features of tax relief for pension contributions.
What is Pension Tax Relief for Contributions?
Pension tax relief was introduced as a government incentive for people to save for their retirement. Instead of paying tax on the contributions you make, the government tops up your pension contribution. However, there are limits on the amount of tax relief you can receive on your contributions.
In the current tax year, UK taxpayers can obtain ‘basic rate’ tax relief on pension contributions of up to 100% of their ‘relevant UK earnings’ or, the ‘Annual Allowance’ of £40,000, whichever is lower. The annual allowance is the limit you can contribute to your pension each tax year and receive tax relief.
For every contribution you make into your pension, the government will top this up with an extra 20%. This extra top-up is known as ‘Basic-rate tax relief’. This will apply to anyone under the age of 75, even non-taxpayers.
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Let's Take an Example
Paul earns £30,000 per annum, making him a basic rate taxpayer. He makes a contribution to his pension during the current tax year of £35,000. Paul would only receive tax relief on £30,000 of the contribution as tax relief only applies on contributions up to 100% of your salary.
Paul’s pension plan will receive a total contribution of £36,000. This is broken down as follows:
Paul’s personal contribution: £30,000
Government top up in the form of tax relief: £6,000 (20% of £30,000)
Total Contribution – £36,000
The basic-rate tax relief is automatically added to your pension plan anytime you contribute as your pension provider claims the relief on your behalf and adds it to your contribution.
Additional tax relief is can also be claimed for higher and additional rate taxpayers.
The table below summarises the levels of tax relief for UK Tax Payers:
|Tax Band||Pension Tax Relief|
For higher and additional rate taxpayers, the extra relief must be reclaimed through a tax return. Higher rate taxpayers can claim a further 20% tax relief and additional rate taxpayers can claim up to 25%.
Let's Take Another Example:
Carol earns £50,000 per annum, making her a higher rate taxpayer. She makes a contribution of £30,000 during the current tax year. Carol will receive basic rate tax relief of 20% which will be claimed on her behalf through her employer. She can also claim an additional 20% relief from HMRC as she is a higher rate taxpayer.
Carol’s pension will receive a total contribution of £42,000. This is broken down as follows:
Carol’s Personal Contribution – £30,000
Government top-up in the form of tax relief: £6,000 (20% of £30,000)
Additional 20% relief – £6,000 (20% of £30,000)
Total Contribution – £42,000
These examples just show why UK pensions are an extremely attractive and tax-efficient method of saving for your retirement.
For more information on UK Pension Tax relief, visit here.
Alternatively, if you would like to talk to one of our consultants about contributing to a pension plan or would like to find out more about setting up a pension plan, contact us today and a member of our team would be happy to help you.
This article does not contain personal or financial advice. It is provided for general information only and does not take into account your personal objectives, financial situation or needs. IVCM is not authorized to provide you with any personal or financial advice.
If you require financial any advice then you must make sure that you obtain advice from a suitably qualified financial adviser.
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