TPAS - The Pensions Advisory Service

Contributions and Tax Relief

Contributions paid by an individual to a Personal Pension Plan or Stakeholder Scheme are made net of basic rate tax. This means that for every £1000 you want to save, you pay out £800. Tax at £200 is then added by HM Revenue & Customs (HMRC) which tops the amount invested up to £1000.

If you are a higher-rate tax payer (40%), you can claim an additional 20% through your tax return. The effect of this is to give you total tax relief of 40%, meaning that every £1000 you save costs you £600.

The maximum amount you can contribute to a personal or stakeholder pension arrangement and on which you can receive income tax relief is equal to 100% of your earnings, subject to not being more than the Annual Allowance. You can pay more than this but there will be no tax relief on the excess. The Annual Allowance is an annual limit set by HMRC. Contributions paid in excess of this amount are unlimited but will give rise to a tax charge on the pension scheme member.

If you do not have any earnings, you can still pay in up to £2,880 in a tax year which, with basic rate tax relief added by HMRC, becomes £3,600.

Contributions can also be paid by the employer and these count towards the Annual Allowance. The Annual Allowance for the tax year 2008/09 is £235,000, inclusive of your own contribution and any other amounts paid into an approved pension scheme. The Annual Allowance increases each year. The rates until the tax year 2010 have already been set and announced. They are:

Contributions in excess of the Annual Allowance can be made but will be subject to a special tax charge of 40%. In measuring contributions against the annual allowance, contributions paid to an arrangement from which all benefits are taken in a particular tax year will be ignored. This effectively means that in the fund year in which you retire and take your benefits, there is no charge in respect of any contributions paid in excess of the Annual Allowance for that year.

Q & As

Can I pay into a Company Scheme and a Personal or Stakeholder Scheme at the same time?

Yes, the old rules which prohibited this unless you earned less than £30,000 p.a., have been scrapped. You can now have contributions paid into as many schemes as you want.

If I am in more than one scheme, how is the Annual Allowance calculated?

Any payments you make are totalled over all schemes to be measured against your total earnings. All contributions, yours and employers, are totalled and measured against the Annual Allowance (£235,000 in the tax year 2008/09).

My Employer's Scheme is final salary. How is the employer contribution calculated in this case?

Your pension earned under the scheme at the end of the year is calculated and measured against that which applied at the beginning of the year. The difference in pension is multiplied by 10 and this is taken as the value of the contributions paid into that scheme in that year. The member's own contributions are ignored in the calculations. However, money purchase AVCs payments are counted as additional payments.

The amount of the pension earned at the beginning of the year is increased by a factor to allow for normal earnings growth. This factor is the greater of 5%, the increase in the RPI, and an amount prescribed by regulation.

I have a Retirement Scheme which allows me to go back and apply used tax relief from earlier years. Can I still do this?

No. The old carry forward and carry back rules have been scrapped.

I am contracted out from the State Second Pension through a Personal Pension. Do the contributions from HMRC count toward by Annual Allowance?

No, such contributions are ignored.

Is it true that in my year of retirement, I can pay in as much as I want?

You can pay as much as you want in any year, but tax relief is limited to the amount of your earnings, no matter which year they are paid.

If your earnings are less than the Annual Allowance (£235,000 in tax year 2008/09), you or your employer can contribute, without limit, in the year in which you take your benefits.

I am going Overseas for a couple of years. Can I continue to contribute to my Stakeholder Scheme?

Yes, you can continue to contribute for up to 5 years.

I want to take out life assurance through my personal plan. Will this still be possible and how will it work?

You can still provide life assurance through a personal or stakeholder plan. The new pension rules define an amount that can be paid out of all your pension schemes combined as a lump sum and that lump sum is tax free. This amount is known as the lifetime limit, which is £1.65 million for the tax year 2008/09. Any amount in excess of this is taxed. In assessing the lifetime limit, any pensions paid on death are included as well as lump sums.

There is no restriction on the amount you can spend on buying life assurance through a pension scheme. You will get full tax relief provided the cost, added to all your other pension contributions, do not exceed your earnings.

How soon should contributions deducted by my employer be paid across to the scheme?

Whether you are in a company or individual pension scheme, any pension contributions made from your salary should be paid to the scheme provider within 19 days of the end of the month in which the deduction was made. If therefore, for example, your contributions were deducted from your salary on 25 th January, they must be passed to the pensions' provider by 19 th February. With regard to employer contributions, the employer must produce a schedule each year which shows what contributions will be paid and the dates by which they will be paid.