Personal Pensions: Government Contribution

Pensions are one of the most tax efficient ways of saving for retirement, and to make the most of this facility it’s helpful to have a good idea of how government contributions to personal pensions work, and of how much tax relief you’re entitled to simply by putting money into a qualifying scheme.

In this concise guide, we’ll cover the following key topics:

How do government personal pension contributions work?

The government contribution to a personal pension is a type of tax refund that gets added on to the amount you pay into your pension. Each time you make a payment, your pension provider collects this government contribution on your behalf, and adds the gross figure to your pot.

Are all personal pensions eligible for government contributions?

All types of personal pensions – including stakeholder pensions, SIPPs and private pensions as well as workplace pensions qualify for government contributions, as long as they are recognised as registered pension schemes. You can easily check that your scheme is registered by checking with HMRC.

How much tax relief do personal pensions attract?

This will depend on how much income you earn in a given tax year and how much you pay

If you’re a basic rate taxpayer you’re entitled to a 25% government top-up provided you keep contributions within your annual allowance. The 25% top up is claimed automatically by the pension provider and added to your pot.

For example, if you pay £100 into a personal pension each month, your provider will claim 25% from HMRC resulting in a total of £125, which is then invested in your pension pot.

If you’re a higher-rate taxpayer, you can claim 40% tax relief on your personal pension and 45% if you’re in the additional rate bracket, but this needs to be done through your tax return. Speak to an expert if you need advice on how to ensure you’re getting the right amount of tax relief on your pension.

What is the tax relief limit for personal pensions?

In most circumstances, government contributions to personal pensions are capped at 100% of your annual earnings or at the annual allowance of £40,000 – whichever figure is the lowest in your case.

If you do pay more into your pension than you earned in a year or any amount over £40,000 you will therefore not receive any tax relief on the excess.

For example, if you earned £30,000 but chose to put £35,000 into your pension during the same tax year, you’d still get the 25% government top up on £30,000, but the remaining £5,000 will not attract further tax relief.

The same rule applies to any pension contributions you make in a single year that exceed the annual allowance of £40,000 – regardless of your income. Take a look at the official gov.uk personal pension site for more information on how tax relief is allocated depending on your level of earnings, pension contributions, scheme type and other factors.

There are a few circumstances where the annual allowance is reduced, including incomes over £150,000 and for individuals who have already started to draw down from their pension pot but continue to make contributions.

We recommend you consult a qualified pensions expert if you want to know more about these and other exceptions to the usual rules applied to personal pensions.

Tax relief on personal pensions with low income

You are still entitled to a government contribution towards your pension even if you don’t earn enough to pay income tax. So if you earned £4,000 in a tax year for example, you would still be able to claim the government top-up up to 100% of your earnings.

If you’re not currently making any income at all or earn £3,600 or less in a year, the maximum you can pay into a pension scheme in a year is £2,880, which results in £3,600 with the government top up added on. Any additional contributions will not be subject to the top up.

Speak to an expert on Personal Pensions today

If you need further guidance on how to make the most of your personal pension allowances or you simply want to ensure you’re getting all the government contributions you’re entitled to, please feel free to make an enquiry or call us on 0808 189 0463, and we’ll be happy to refer you to one of the experienced pensions advisors we work with.