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Are you making the most of your pension tax relief?

Everyone’s entitled to tax relief when they pay into a pension. Even non-taxpayers. So, what can you pay in and how much tax relief will you get?

Tax benefits depend on individual circumstances and are subject to change, but here we explain the current pension-related benefits.

Tax relief depends on your tax rate

Your tax relief depends on how much you pay in, and the highest rate of income tax you pay in a tax year.

For example, if you’re a nil or basic-rate taxpayer, for every £100 you put into your pension, you’ll get £25 tax relief, giving a total contribution of £125. This is because basic rate tax in the UK is currently 20% (and 20% of £125 = £25).

If you’re a higher or additional rate taxpayer (in England, Wales and Northern Ireland), or an intermediate, higher or top rate taxpayer (in Scotland) and paying into a personal or group personal pension, you can claim back additional tax relief via your self-assessment. You just need to include your pension contributions when you file your return.

Some workplace pensions, known as 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 (or in 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.

Most people can pay in up to £40,000 each tax year

The annual allowance for contributions to all pensions within any one tax year – including tax relief – is £40,000. This limit applies to the total of your own contributions and any employer contributions paid on your behalf. 

Within the £40,000 limit, you’re allowed to pay personal contributions up to 100% of your earnings (or up to £3,600 even if you’re a non-earner), so bear this in mind if you don’t receive contributions from your employer.

Please note that 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 can potentially reduce to as little as £10,000.

Remember that the value of your pension can go down as well as up and you could get back less than you’ve paid in.

If you’ve already taken some of your pension…

If you’ve accessed your pension ‘flexibly’ – meaning you’ve taken a taxable lump sum or started withdrawing a flexible income – you’ll have a lower annual allowance of £4,000, unless one or more of the following apply:

  • You only withdrew your tax-free lump sum and not a penny more
  • You were already taking ‘capped drawdown’ before 6 April 2015
  • You bought an annuity with your pension savings rather than taking flexible income withdrawals or a taxable lump sum
  • You cashed in a whole pension pot of up to £10,000 as a small lump sum (no more than three times) 

You can carry forward your annual allowance

If you’ve already used up your annual allowance for this tax year, you may be able to ‘carry forward’ any unused annual allowance from the previous three tax years.

To carry forward unused 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 in a scheme in each of the last three tax years but had no pension contributions paid could potentially put in £160,000 in the current tax year.

To get tax relief on such high personal contributions in one tax year, you would have to have earnings of at least the amount you wish to pay in yourself. More likely, the contributions would be paid by your employer.

Bonus question

Investing a bonus payment could be an ideal way to boost your pension fund and make the most of tax relief. Even better, if your employer’s willing to pay it directly into a pension, you’ll both avoid National Insurance contributions, giving you a little more still in your pension pot.

Paying in together

Did you know your partner could get tax relief when you pay into their pension? The rules are just the same as if they were making payments themselves. It’s another way you could both make the most of the tax benefits of pensions.

So why care about tax years?

With such generous allowances, the question of this tax year or next may not seem important. But there’s no guarantee allowances will always stay this high, so it's worth taking advantage of this allowance while you can.