Tax relief and contributions
Pensions are a tax-efficient form of saving. You receive tax relief on contributions that you pay into your pension.
When paying into your pension, you’ll receive tax relief on any contributions that you make. This is at the highest rate of income tax that you pay, provided both the following apply:
(i) the total gross pension contributions you pay into your pension scheme do not exceed the lower of:
- your annual earnings; and
- the annual allowance.
(ii) the total gross pension contributions paid by you, your employer and anyone else don't exceed the annual allowance.
If you don't have earnings
If you don’t have any earnings (for example, if you don’t work) or earn less than £3,600 each year, you can make gross contributions of up to £3,600 each year to a personal pension, self-invested personal pension, or stakeholder pension receiving basic rate income tax relief at, currently, 20% on your contribution. You can pay in higher amounts than your maximum limit, but you don't receive tax relief on the excess amounts. It’s good to remember that you may have to repay any tax relief that you have received from HMRC on these excess contributions. You also don’t receive tax relief on any payments that your employer pays into your scheme. This includes contributions that you have elected to make through salary sacrifice.
The way that you receive tax relief on your contributions depends on the type of scheme you belong to. Please see below for more detail.
Workplace pension schemes
There are three different ways that you may receive tax relief on your contributions.
1. Your employer deducts your contributions from your pay before they deduct tax from your pay.
This means that you receive tax relief at the highest rate of tax that you pay. This is called a net pay arrangement. You can find out if you’re in one of these schemes by looking at the scheme booklet or asking the scheme administrator.
2. Your employer takes your contribution from your net pay (after tax has been deducted but before they pay you) and pays this to your pension provider on your behalf.
This method is most likely if you’re a member of a group personal pension, group self-invested personal pension or group stakeholder pension scheme, but could also apply to other types of personal pension schemes. This is called relief at source.
The pension provider then claims back basic rate tax at 20% from HMRC, and adds this to your pot. So, for example, if your employer has deducted a contribution of £80 from your net pay, your pension provider claims back a further £20 so a total gross contribution of £100 is paid into your pension.
If you’re a higher rate taxpayer, you can claim further tax relief (at your higher rate less the basic rate already claimed on your behalf) from HMRC. This is usually claimed through your self-assessment tax return, although HMRC may also adjust your tax code to give you this additional relief.
3. If you're paying pension contributions through a salary sacrifice arrangement agreed with your employer, this is treated as an employer contribution, with the same effect for you as receiving tax relief but also with a saving on NI contributions.
Personal pension, self-invested personal pension and stakeholder pension schemes
If you have set up your own scheme, the contributions that you pay into the scheme are usually treated as being paid net of basic rate income tax relief.
Like workplace personal pension schemes, your pension provider will claim back basic rate tax at 20% from HMRC adding this to your pot. Again, this means that if you pay a contribution of £80, your pension provider claims back a further £20 so a total gross contribution of £100 is paid into your pension pot.
If you're a higher rate taxpayer, you can claim further tax relief (at your higher rate less the basic rate already claimed on your behalf) from HMRC. This is usually claimed through your self-assessment tax return, although HMRC may also adjust your tax code to give you this additional relief. This means that if you pay income tax at 40%, you could claim an additional £20 tax relief, making your net contribution £60 in the above example.
If someone else (not your employer) pays into your pensions scheme
If someone else (apart from your employer) pays into your pension scheme, their contribution is treated paid net of basic rate income tax (which your pension provider reclaims on your behalf and adds to your pension pot). But, you can still claim higher rate relief (less the basic rate) if you’re a higher rate taxpayer.
If you pay into someone else’s pension scheme
If you pay into someone else’s pension scheme (for example, your partner’s or children’s pension schemes), your contribution is treated as paid as net of basic rate income tax.
The pension provider claims back basic rate tax at 20% from HMRC and adds this to the pot that you have paid into. You can’t claim any tax relief yourself on your contribution, as it’s treated as if it had been paid by the member as the pension provider will claim basic rate income tax relief on the member’s behalf. The member, even though they have not paid the contribution, can claim any higher rate tax relief if they’re a higher rate tax payer.
Paying into specific types of pension schemes
If you’re paying contributions into certain types of pension scheme (such as a retirement annuity contract that you started before 6 April 1988) and your contribution is not treated as paid net of basic rate income tax relief, you can claim back all tax relief due (both basic rate and any higher rate relief) from HMRC.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.