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What is pension tax relief? How it can help you reach retirement goals


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There are many excellent reasons to save into a pension. One of them is the tax relief you benefit from, but many pension savers are overlooking this valuable boost to retirement savings.


According to a Royal London survey, just 15% of people fully understand how tax relief on pensions is paid. Importantly, once people had a better understanding of how pensions tax relief works, 25% were more likely to increase pension contributions. Tax relief can help boost your savings and put you on a path to a more comfortable retirement.


What is pension tax relief?


Pension tax relief is offered to encourage more workers to save for their retirement.


When you contribute to a pension, some of the money you would have paid in tax on your earnings goes into your pension rather than to the government. Tax relief is paid at the highest level of Income Tax you pay:

  • Basic-rate taxpayers receive 20%

  • Higher-rate taxpayers receive 40%

  • Additional-rate taxpayers receive 45%.

In Scotland, the tax bands are slightly different and affect how much tax relief you receive:

  • Starter-rate taxpayers receive 20%

  • Basic-rate taxpayers receive 20%

  • Intermediate-rate taxpayers receive 21%

  • Higher-rate taxpayers receive 41%

  • Top-rate taxpayers receive 46%.

If you wanted to add £100 to your pension, tax relief means you wouldn’t need to take the full amount out of your own income or savings. If you’re a basic-rate taxpayer, you can add £80, and the government boost will mean an extra £20 is added, as this is the amount that you would have paid in tax when receiving your income.


Higher-rate and additional-rate taxpayers would only need to add £60 and £55, respectively, to their pension to benefit from a £100 boost.


Tax relief is a useful way for making your retirement savings go further and can mean you’re able to look forward to a far more comfortable retirement. Tax relief is one of the reasons that adding money to a pension is a tax-efficient way to save for the long term.


The relief you receive will usually be invested through your pension, helping it to grow even further, along with your and your employer’s contributions.


How do you receive pension tax relief?


Usually, your pension provider will automatically send a request to HMRC for 20% tax relief, but you will need to complete a self-assessment tax return to receive your full entitlement if you’re a higher- or additional-rate taxpayer. It’s worth reviewing your pension contributions and tax relief to ensure you’re receiving your full tax relief.


2 pension tax relief allowances you need to be aware of


While tax relief is valuable, two allowances limit how much you can place into your pension while benefiting from tax relief.


1. Annual Allowance


The Annual Allowance is the amount you can save into your pension each tax year while still benefiting from tax relief.


The maximum Annual Allowance is £40,000 or 100% of your annual earnings. However, if you earn more than certain thresholds, your annual allowance will reduce under the tapered Annual Allowance. These thresholds are:


  • £200,000 threshold income (your net income for the year, including salary, bonus, etc.)

  • £240,000 adjusted income (your income, plus the value of your or any employer pension contributions).


For every £2 you exceed these thresholds, your Annual Allowance is reduced by £1. The maximum deduction is £36,000, meaning some high earners are left with an Annual Allowance of just £4,000 per tax year.


If you’ve already started drawing an income from your pension, you may be affected by the Money Purchase Annual Allowance (MPAA). This will reduce your Annual Allowance to £4,000.


It’s important you understand what your Annual Allowance is to make the most of your pension contributions and avoid unexpected tax bills. If you have any questions, please contact us.


2. Lifetime Allowance


The Lifetime Allowance is the total amount you can save into your pension while still benefiting from tax relief.


The Lifetime Allowance is currently £1,073,100. This may seem like a lot, but it can be easier to exceed than you think. The Lifetime Allowance applies to the total value of your pension, including your contributions, employer contributions, tax relief, and investment returns. Over decades of working, you may be closer than you think to the allowance.


You can still add to your pension if you exceed these limits, but you could find yourself with an unexpected bill. In some cases, it still makes financial sense to contribute to your pension. For example, your investments will still grow free from Capital Gains Tax, and your pension scheme may offer auxiliary benefits, like a spouse pension, that are valuable to you. In other circumstances, it may make more sense to invest or save your money elsewhere.


If you’d like to discuss how pension tax relief can help you build up your retirement savings or whether you’re close to exceeding your allowances, please contact us.


Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.


A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.


Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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