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Your pension and end of year tax relief

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AR011069 02/2018

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

The amount of tax relief you get 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.

Most occupational pension schemes (workplace or company pensions) deduct contributions from gross earnings. If you are in one of these schemes, you’ll 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 are unsure how you get tax relief for your workplace pension, ask your employer.   

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.

People age 55 and over who have accessed their pension flexibly – 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 6th 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 on up to three occasions.  

Those who have not used their annual allowance for previous years can carry forward unused relief from the previous three tax years, which are 2014/15, 2015/16 and 2016/17. The annual allowance in all three of these years was £40,000 (with special transitional rules applying in 2015/16). People who paid nothing in those years could potentially put in £160,000 this year.  To use carry forward you must have been a member of a pension scheme at some point in the carry forward year or an earlier tax year.  If you do plan to carry forward unused relief from 2014/15, this must be done by 5th April 2018 and you must pay in the maximum for 2017/18 first.

To get tax relief on such high contributions in one tax-year,
you’ll either have to have earnings to justify those contributions; or, more likely, the contributions are paid by your employer.

And another word of warning: if you earn more than £150,000 including the value of any pension contributions paid by you, or on your behalf, 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, as the rules for high earners are complicated. 

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