A simple guide to pension tax relief

Pension tax relief seems tricky at first, but it’s one of the best-kept secrets for boosting your retirement savings, and we think it’s time the genie finally leaves the bottle. So in this blog post, we’re going to break down how pension tax relief works, how to know if you’re eligible, and much more.

It’s a little extra help from the government to grow your pension pot – money that would otherwise just go to the taxman – so let’s get into it, shall we?

This guide covers:

• Understanding Pension Tax Relief
• Are You Eligible?
• Choosing Your Path
• Safeguard Your Golden Years

What is pension tax relief, and how do I know I’m eligible?

Pension tax relief is a government incentive that lets you reclaim any income tax paid on your pension contributions, boosting your retirement savings. Basic-rate taxpayers receive 20% relief automatically, but higher earners can claim extra through their tax funds.

Want to know if you’re eligible for extra under pension tax relief? There are a couple of boxes you need to tick.

• Are you under 75 years old?
• Do you live in the UK?

If this is you, here’s how much you can contribute with tax relief:

• If you have income, you can receive tax relief on pension contributions up to 100% of your annual earnings.
• If you’re not earning or earn very little, you can contribute up to £2,880 per year, which can be topped up to £3,600 through tax relief.

This means even if you’re on a low income or aren’t working, you can still benefit from tax relief to grow your pension.

Claiming tax relief for yourself

Under certain conditions, you will need to actively claim tax relief on your pension contributions, such as:

• You pay Income Tax at a rate above 20%, and your pension provider claims the initial 20% for you (relief at source).
• Your pension scheme does not automatically apply tax relief.
• Someone else contributes to your pension on your behalf.
• Your contributions exceed £10,000 (you should contact HMRC to claim this tax relief directly.)

If you pay Income Tax above 20% (England, Wales or Northern Ireland)

If your individual income tax rate exceeds 20%, you’re entitled to claim the following:

• An additional 20% tax relief on amounts up to the income you’ve paid 40% tax on.
• An additional 25% tax relief on amounts up to the income you’ve paid 45% tax on.

This additional tax relief can be claimed on your Self-Assessment tax return. Alternatively, for those paying at the 40% rate, contact HMRC directly via telephone or mail.

For example:

If you earn £60,000 in the 2023/24 tax year, paying 40% tax on £10,000 of that income, and you contribute £15,000 to a private pension:

• Automatic tax relief – You’ll receive 20% tax relief on the full £15,000.
• Extra tax relief – You can claim an additional 20% tax relief on the £10,000 taxed at the higher rate through your Self-Assessment tax return.

The remaining £5,000 doesn’t qualify for extra relief.

If you pay income tax above 20% (Scotland)

For Scottish taxpayers, the process to claim additional tax relief on pension contributions looks like this:

• 1% additional tax relief for income taxed at 21%.
• 21% additional tax relief for income taxed at 41%.
• 26% additional tax relief for income taxed at 46%.

These claims can be made through your self-assessment tax return or by contacting HMRC directly.

If your pension scheme is not set up for automatic tax relief

If your pension scheme does not automatically apply tax relief, you should claim it on your Self-Assessment tax return or by directly contacting HMRC. Tax relief can only be claimed if your pension scheme is registered with HMRC.

If someone else pays into your pension

When a third party, such as a partner, contributes to your pension, you automatically receive 20% tax relief if your pension provider claims it on your behalf (relief at source).

However, if you’re part of a workplace pension that accepts contributions from others, you may need to claim this tax relief directly from HMRC.

Relief at source or net pay?

There are two main ways tax relief can be applied to your pension contributions:

• Relief at source
• Net pay

Both methods help you save, but they work in slightly different ways.

Relief at source – a boost for your post-tax contributions

With relief at source, you make your pension contribution from your income after tax has already been taken. The government then steps in to add 20% relief to these contributions.

For example, if you contributed £80, you’ll get a £20 top-up for a total of £100. This is especially useful if you’re on a lower income or not paying tax, as you still get relief regardless of your tax bracket. And if you’re a higher earner, you can claim back even more through a self-assessment return and boost savings further.

Net pay – upfront reduction

The net pay method takes your pension contributions from your salary before tax is calculated. This reduces your taxable income, so you pay less tax right away. This is also helpful for people in higher tax brackets, as you automatically get tax relief at your highest rate.

For example, if you’re a 40% taxpayer, every £100 contribution to your pension effectively only costs you £60 since you’re saving £40 in tax.

Making the most of pension tax relief

Understanding pension tax relief can make a real difference to your retirement savings. It’s all about giving your money a little extra push so you can enjoy a more comfortable retirement. In other words, taking advantage of pension tax relief now can mean a bigger pension pot later down the line. Whether you’re just starting out or have been contributing for years, there’s always room to make your pension work harder for you.

If you’re unsure about any part of the process or think there might be an issue with how your pension has been set up, we’re here to help with expert guidance. Our team has the know-how to answer your questions and make sure you’re on the right track with your pension planning.