Make the most of pension tax relief

Discover why pension contributions are a great way to claim back some of the tax you pay

Personal pension contributions are a great way to claim back some of the tax you pay. In fact, even non-taxpayers can get tax relief added to their pension contributions.

Ex-employee

Just because you've retired or have reduced the number of hours you work, doesn’t mean you should stop paying into your pension. The upper age limit for getting tax relief is 75.

It's arguably even more valuable to older people to pay into their pension because they can access the money right away.

However, some schemes may not allow you to continue to pay into your pension if you're a non-taxpayer. Or you may be charged a fee if you want to do this. You'll need to check the details of your particular pension scheme.

An example of how it could work

John is retired and doesn’t pay tax because his income is only £9,000 a year. He pays £2,880 into his pension. 

Tax relief is added, topping up the amount paid into his pension to £3,600. 

As John is over 55, he can take his pension out immediately – a quarter (£900) is tax-free and the other three-quarters (£2,700) is taxable. 

However, when John adds all his taxable income together (£9,000 income and £2,700 pension) the total is £11,700. This is still less than his personal allowance of £12,500. This means that John can receive the £2,700 from his pension without paying tax.

So, in total, John has paid £2,880 into his pension but he's been able to immediately withdraw £3,600, giving him an instant profit of £720.

As an alternative, John could have taken a regular income from the £2,700 or bought a lifetime annuity from an insurance company. This is a great way to top-up pension income, especially for those people who pay no tax on their income. 

For example:

  • John, who is retired and doesn’t pay tax because his income is only £9,000 a year, pays £2,880 into his pension. 
  • Tax relief is added, topping up the amount paid into his pension to £3,600. 
  • As John is over 55, he can take his pension out immediately – a quarter (£900) is tax-free and the other three-quarters (£2,700) is taxable. 
  • However, when John adds the £2,700 onto his other taxable income of £9,000, the total of £11,700 is still less than his personal allowance of £12,570. 
  • This means that John can receive the £2,700 without paying tax.
  • In total, John has paid £2,880 into his pension and immediately withdrawn £3,600, giving him an instant profit of £720.

As an alternative, John could have taken a regular income from the £2,700 or bought a lifetime annuity from an insurance company. This is a great way to top-up pension income, especially for those people who pay no tax on their income.

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 extra tax relief via self-assessment if they are paying into a personal pension or a group personal pension.

Make sure that you include personal 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 workplace pension schemes deduct contributions before tax. If you are in one of these schemes, you will automatically receive all the tax relief you are due up front. One or two exceptions to this rule, such as the government’s National Employment Savings Trust (Nest), 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.

You can pay up to £40,000 into a pension in any tax year

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 are 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. Any contributions paid in excess of this annual limit (the Annual Allowance) may leave you liable to a tax charge on the excess amount.

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 some taxable income - 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 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
  • You cashed in your whole pension pot of £10,000 or less as a small lump sum on up to three occasions

The Annual Allowance can also be reduced if you are a high earner

Individuals who have taxable income, including employer contributions, in excess of the adjusted income limit, set by HMRC, of £240,000 may be affected by the Tapered Annual Allowance. This tapering could reduce the amount that can be contributed into your pensions in a tax year to as little as £4,000.

If you think you may be affected by this we recommend you seek suitably qualified financial advice

Tax rules may change and are dependant on your individual circumstances.

Other ways to look after your finances

Understand how you can use your pension money – and other funds – to get the retirement you want.