Personal Pension Contributions and Tax Relief

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What is personal pension tax relief and how does it work?

In order to reward and further encourage UK residents to save for their retirement, HMRC (Her Majesty’s Revenue and Customs) provides financial assistance by offering additional tax-relief on all personal pension plans.

Tax relief allows you to allocate earnings which would typically be subject to income tax towards a pension fund you can use for an income when you retire. The amount you receive is based upon your current marginal rate of tax.

If you’re a basic-rate taxpayer you will receive 20% tax relief on your personal pension payments, 40% if you’re a higher-rate taxpayer and 45% for all additional-rate taxpayers.

How is personal pension tax relief calculated for basic-rate taxpayers?

For all personal pensions, basic-rate tax relief is always claimed ‘at source’.

Any pension contribution made by a scheme member, whether made directly to a provider or through an employer, is paid after the deduction of income tax and national insurance.

The actual payment you make will, therefore, equate to 80% of the overall amount or ‘net’ of basic-rate tax relief. Your provider or employer applies directly to HMRC for the additional 20% which is paid directly into your personal pension fund.

The table below provides a range of examples to illustrate how basic-rate tax relief is calculated:

Net monthly pension contribution Basic-rate tax relief (20%) Total gross personal pension contributions
£100 £25 £125
£200 £50 £250
£300 £75 £375
£400 £100 £500

As you can see from the examples above, the addition of tax relief makes a significant difference to your overall pension contributions. In effect, your pension payments are benefitting from 20% interest before any other investment growth is attributed.

Tax relievable contributions are a key reason why personal pensions are such a popular way to save for retirement. If you’d like to know more about how they work, give us a call on 0808 189 0463 or get in touch and we can arrange for an expert to speak with you directly.

How can I calculate higher or additional-rate tax relief on personal pension contributions?

Unlike for basic-rate taxpayers, both higher and additional-rate tax relief is provided through an increase to the income tax thresholds by the equivalent of the gross contribution made to your personal pension plan.

In effect, HMRC are allowing a proportion of your income which falls into these higher-rate brackets to be taxed at a lower rate, reducing your overall tax liability by the amount of relief you’re pension contributions are entitled to.

By way of an example, if you earn £70,000 in a tax year but do not make any personal pension contributions, £20,000 of this income will be subject to 40% higher-rate tax (based on current income tax thresholds). This equates to £8,000.

Based on the same earnings, if you make total gross pension contributions of £20,000 the basic-rate threshold would increase by this amount, meaning you would only pay 20% income tax rather than 40%, resulting in a difference of £4,000.

The overall tax-relief you would have received for these contributions would be £4,000 at source plus a further £4,000 which, added together equates to 40% of the original gross amount.

The same calculation applies for additional-rate taxpayers whereby both basic-rate and higher-rate thresholds would be increased by the amount of gross personal pension contributions in order to allow for the further tax relief available.

How do you get higher rate tax relief on personal pension contributions?

If you’re a higher-rate taxpayer (total income between £50,001-£150,000 for current tax year – 2019/20) there are two ways you can claim the additional 20% tax relief:

  • Submitting a self assessment tax return
  • Direct contact with your local tax office

If you choose to submit a tax return you need to include the full amount of gross pension contributions made during the relevant tax year, including any payments from a third party (family member, for example) but excluding all employer contributions.

If you’d prefer not to submit a tax return you can contact your local tax office directly either via phone or in writing. You will need to provide details of all the personal pension schemes you’re contributing to, when these began and total gross contributions for that particular tax year.

If you’re an additional-rate taxpayer (total income in excess of £150,000 for current tax year – 2019/20) you will only be able to claim the further 25% tax relief for your personal pension payments by submitting a self-assessment tax return.

Understanding how higher and additional-rate tax relief is claimed can seem quite complex. This is where we can help.

If you make an enquiry we can arrange for an expert to get in touch and discuss this in more detail with you.

Can I claim the higher-rate relief on my personal pension payments through my tax code?

Yes, this is possible. Once you’ve submitted a tax return or contacted your local tax office, there are generally three ways in which either higher or additional-rate tax relief can be given:

  • By altering your tax code
  • Receiving a tax rebate
  • A reduction in any income tax already owed to HMRC

In the case of both higher and additional-rate taxpayers, it’s important to note that any further relief will simply reduce your overall tax liability rather than contribute further funds directly into your personal pension.

Can I claim tax relief on my personal pension contributions if I’m a non-taxpayer?

Yes, basic rate tax relief is available on personal pension contributions even if your earnings fall below the personal allowance threshold (£12,500 for 2019/20) up to a maximum of £3,600 per annum or 100% of your total income – whichever is the higher amount.

So, as an example, if you earn £8,000 per year you can contribute up to this amount towards a personal pension and still receive basic-rate tax relief. If you have no earned income at all the maximum gross contribution you can make would be £3,600.

In either example, the opportunity to receive additional tax relief on any pension payment as a non-taxpayer makes these type of savings highly attractive.


What is the maximum tax relief HMRC will allow on personal pension contributions?

There are limits for how much you are allowed to pay into a personal pension and still receive tax relief on your contributions. The current maximum amount is the lower of either of the following:

If, as outlined above, you have no earned income whatsoever, the maximum amount you can save into a personal pension and still receive tax relief is £3,600 gross per annum.

For higher earners the annual allowance can be reduced by as much as £30,000 through a process of tapering. Anyone with total UK earnings between £150,000 and £210,000 could see their allowance shrink to a maximum of £10,000.

If you’re a high earner and concerned you may not be able to contribute as much as you would like to your personal pension – don’t panic. You are allowed to carry forward unused allowances from previous tax years in order to maximise your contributions.

Give us a call on 0808 189 0463 or make an enquiry and we will arrange for an advisor we work with to get in touch and explain how this works in more detail.


Can I use a calculator to work out my tax relief?

Yes, most definitely. Online calculator tools are quite commonplace these days and are an effective way of providing you with a snapshot of how much tax relief you could receive, based on how much you wish to pay into your personal pension.

However, what is most important is that your pension contributions remain on track to return the income you need once you retire, which is why regular reviews of your pension provision with an experienced professional advisor are always recommended.

This is where we can help. If you get in touch we can arrange for an advisor we work with to contact you and review your current retirement provisions.


Speak to a pensions expert

If you’re currently paying into a personal pension, regardless of which income tax bracket you currently fall under, it’s important you know how tax relief works so you can maximise your contributions.

The advisors we work with can provide further clarification and review your existing pension provision. All advice is free and any information is always given in the strictest confidence.

Call us on 0808 189 0463 or make an enquiry to get started.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Book a free, no-obligation pension review today