Are you making the most of your pension tax relief?

It's possible to get tax relief when you save into a personal pension. Even if you're a non-taxpayer. It's a smart way to prepare for your future – but how much can you pay in?

Pension contributions are a great way to claim back some of the tax you pay. Everyone gets tax relief when you pay into a pension. Even non-taxpayers. It’s a smart way to prepare for your future – but how much can you pay in?

The tax relief you can get depends on your tax rate

Your tax relief depends on how much you pay in, and your highest marginal rate of income tax.

For example, if you are a nil or basic rate taxpayer, for every £100 you put into your pension, you will get £25 tax relief giving a total contribution of £125 – the rate of tax relief works out as 20% (20% of £125 = £25).

Higher and additional rate taxpayers can claim back additional tax relief via self-assessment if they are paying into a personal pension or a group personal pension.

Make sure that you include pension contributions when you file your self-assessment return each year.

If you have a workplace pension, you’re probably already getting tax relief 

Most occupational pension schemes deduct contributions from gross earnings. If you’re in one of these schemes, you'll automatically receive all the tax relief you’re due up front – unless you're earning below the personal threshold of £12,500 and in an occupational scheme. Another exception would be the government’s National Employment Savings Trust (Nest), as they deduct contributions from net earnings just like personal pensions.     

If you're unsure how you get tax relief for your workplace pension, ask your employer.     

The overall maximum you can pay into a pension, with tax relief, in any tax year is £40,000

If you have a personal pension, the annual limit for pension contributions within any one tax-year is £40,000. This cap applies to the total of your own contributions and employer contributions paid on your behalf. 

Within the £40,000 limit, you’re allowed to pay personal contributions up to the higher of 100% of your earnings or £3,600 (£2,880 net of basic rate tax relief), so bear this in mind if you do not receive contributions from your employer.

This maximum can be lower if you’ve already taken some of your pension

People aged 55 and over who have accessed their pension flexibly – generally defined as having taken a taxable lump sum or income withdrawal - have a lower annual allowance of just £4,000 instead of £40,000. The lower annual allowance does not apply if:

  • You only draw out your tax-free lump sum and not a penny more;
  • You were already taking ‘capped drawdown’, which you started doing before 6 April 2015;
  • You bought an annuity with your pension savings rather than taking income withdrawals; or
  • You cashed in your whole pension pot of £10,000 or less as a small lump sum on up to three occasions 

You can carry forward your annual pension allowance

Those who have not used all their annual allowance for previous years can carry forward unused annual allowance from the previous three tax years.  

To carry forward unused annual allowance from a tax year, you must have been a member of a registered pension at some point in that tax year. People who have been a member of such a scheme in each of the last three tax years, but have had no pension contributions paid, could potentially put in £160,000 this year.

To get tax relief on such a high personal contributions in one tax-year, you would  have to have earnings to justify that contributions; or, more likely, the contributions are paid by your employer. 1

If you’re a high earner – get professional advice

If you earn more than £110,000 (excluding the value of any pension contributions paid by you or on your behalf) and more than £150,000 (including the value of any pension contributions), the annual allowance is restricted to as little as £10,000 for those with ‘adjusted income’ of £210,000.

If your income is above £110,000 and you plan to put in large pension contributions, it probably makes sense to get financial advice - the rules for high earners are complicated. If you do require advice a fee will be charged.