HOW DOES PENSION TAX RELIEF WORK?
This article should tell you what you need to know about tax relief on pensions.
- How pension tax relief works
- Reclaiming pension tax relief for higher rate tax payers and self employed
- Claim your free retirement checklist
What is a pension plan?
A pension plan is a long-term savings plan, which allows you to grow your money towards an income and capital lump sum at retirement. The major benefits of pension plans are the largely tax-free growth of the savings, and the tax relief on contributions.
Different types of contributions
Pension plan contributions can be made by you or your employer. If you make the contributions they will be entitled to tax relief. Employer contributions do not attract tax relief, but instead save the employer tax.
How does pension tax relief work?
Pension tax relief acts by boosting the payments you make to your pension plan. For every £100 you pay into your pension plan, you get £25 as tax relief.
This represents a return of the basic rate income tax paid by you (at 20%). So the more you pay in, the greater the pension tax relief you can get.
Pension tax relief is one of the biggest advantages of pension plans – after all there are not many investments where you can guarantee a 25% growth on your contributions on day 1.
Members of occupational or public sector schemes
You will get the total benefit of full pension tax relief at source when the contributions are deducted from your salary. The pension contributions will be deducted before income tax is taken so you will save tax at 20%, 40% or 45%. The basic rate tax would be added to your pension plan as in the picture above. Higher rate tax payers would save further tax instantly.
Personal pensions – reclaiming additional tax relief for 40% or 45% income tax payers
If you pay into a personal pension and also pay income tax at 40% or 45% you can reclaim additional tax pension tax relief through your tax return. Alternatively, you may be able to ask the tax office to adjust your tax code to reflect the pension plan contributions, and thus save tax at source.
- As a 40% income tax payer your £100 contribution would attract a further £41.66 back in tax saved;
- As a 45% income tax payer your £100 contribution would attract a further £56.81 back in tax saved.
Pension tax relief for the self employed
You will need to account for your pension contributions in your tax return. If you pay income tax at a higher rate than 20% you will also get to reclaim the additional tax relief due.
Maximum pension tax relief
The limit on the allowable contributions into your pension plan is 100% of your earned income for the tax year to a maximum of £50,000 (the annual allowance); this allowance is being reduced to £40,000 from April 2014. You can contribute up to £3,600 to a pension plan without needing to prove any income and still get the pension tax relief.
Pensions can be a complex area, and contributions are only the start. If you want help with your pensions questions, why not contact us?
What to do if you are retiring soon
Check out how we help you Prosper during retirement using the button below.
Find out how we can help you to Prosper during retirement.
Latest posts by Dan Woodruff (see all)
- How likely are you to need nursing care? - October 11, 2017
- Personal Injury Trust Investment - October 3, 2017
- What pension death benefits are paid when you die? - September 13, 2017