One of the major benefits of paying into a pension is the tax relief you receive on your contributions, which can be particularly generous if you’re a higher or additional rate taxpayer.
Put simply, pension tax relief means that the money that you would have paid in tax on your earnings to the government goes into your pension instead. When you pay into a personal or workplace pension scheme, the government essentially tops up the amount you save, and this tax relief can make a big difference to the value of your pension pot over time.
If you’re a higher rate taxpayer, you’ll receive 40% tax relief (compared to 20% at the basic rate), which effectively means that every £100 you pay into your pension from your earnings after tax is increased to around £166 (that’s because £166 taxed at 40% falls to £100). That’s a hefty 66% increase on your contribution. However, whilst 20% basic rate tax relief is paid automatically, if you’re a higher or additional rate taxpayer you’ll usually have to claim the extra 20% or 25% tax relief back yourself.
Rachael Verinder, director at accountants Verinder Powell Associates, said: “There are so many people who don’t realise that they are entitled to higher rate pensions tax relief, or they don’t know how to claim this. But you won’t get returns like this elsewhere, and it’s really important to take advantage of your entitlement to this relief.”
Here, we explain how higher rate pension tax relief works, and how to claim it.
- How pension tax relief works
- How you receive higher rate tax relief by altering your tax code
- Claiming higher rate tax relief via your tax return
- What are your pension allowances?
- Can you ever claim tax relief on more than your Annual Allowance?
- Can other people pay into my pension and will I receive tax relief on this money?
- Where to go for further help
How pension tax relief works
You usually pay tax through PAYE if you’re an employee, or directly to HMRC after completing a self-assessment tax return if you’re self-employed. However, by paying into a pension, some of this money is repaid to you, so you will save tax on your contributions, known as tax relief. You can read more in our article How pension tax relief works.
You receive pension tax relief at your marginal rate of tax. If you’re a basic rate taxpayer, you receive 20% tax relief, while higher rate taxpayers can claim 40% tax relief.
If you earn more than £125,140, this makes you an additional rate taxpayer, so you pay a tax rate of 45% on earnings over this threshold. Therefore, you can claim tax relief at an extra 5% on top of the higher rate, giving you a total of 45% tax relief on pension contributions over this threshold.
Where your income falls into several tax bands, the relief given may be at a mixture of rates. The additional tax relief that higher rate taxpayers can claim is particularly beneficial, as it effectively amounts to more than twice the amount of tax relief that basic rate taxpayers receive.
If you are a basic rate taxpayer and want to add £100 to your pension, you only need to pay in £80. The government adds an extra £20 in tax relief on top, which is the amount it would have taken in tax from your salary. Higher rate taxpayers and additional rate taxpayers pay the same £80 at the outset, but then receive higher tax relief. This means that to end up with the same £100 in their pension they only need to contribute £60 or £55 respectively.
For example, let’s say you earned £80,000 in the 2023/24 tax year, and paid £8,000 into your pension after tax. The government repays the 20% basic rate tax taken from your earnings, so the total that’s paid into your pension is £10,000. However, you’re entitled to another 20% tax relief as a higher rate taxpayer (taking the total relief to 40%) – giving you another £2,000 tax relief – and bringing the actual cost of your contribution down to £6,000.
The majority of pension tax relief applied to workplace and personal pensions is applied to contributions after tax (net contributions, as the example uses above). However, if you’re in a salary sacrifice arrangement, when you and your employer agree to reduce your pay in exchange for certain benefits, such as pension contributions, then your pension contributions will be made gross (you can find out more about these below).
The consumer association Which? has a useful pension tax relief calculator which can give you an idea of how much tax relief you’ll get on your pension contributions.
How you receive higher rate tax relief by altering your tax code
You automatically receive tax relief at the basic rate of 20% in your pension, but unless you have a salary sacrifice agreement, you need to reclaim the additional 20% on top that you’ve paid on your income over the higher rate tax threshold.
If you’re paying into a workplace pension, you’ll usually need to ensure you receive this by contacting HMRC to request an adjustment to your PAYE code. You need to ask that higher rate pension tax relief is included in your tax code.
Verinder said: “Your employer wouldn’t usually request a change in your tax code for you. However, you should have a PAYE coding notice with contact details for HMRC included, and you can use these to request that your code includes higher rate pensions tax relief. The exact code you receive depends on how much you’re paying into your pension, as HMRC adjusts your code according to the amount you pay.” You can find details on how to contact HMRC about changes to your tax code at GOV.uk, either online, by calling 0300 2003300. Bear in mind that you may need to contact HMRC again if you change the amount you pay into your pension.
If you wish to write to HMRC, you may use the address on your P60 or payslip, detailing exactly how much you have contributed to your pension. You will need to include details of the personal pension that contributions are being paid to, the date that contributions start, and the gross amount of contributions paid. Your tax code should then be changed so that higher rate tax relief is applied when contributions are being made. You can notify HMRC of any changes to the amount paid into your pension by writing to them or completing a self-assessment tax return at the end of that tax year.
You can only adjust a tax code for the current tax year. For a tax year that has already ended, you may have to write to HMRC to submit a backdated claim (there is a four year time limit).
Claiming higher rate tax relief via your tax return
You can also reclaim higher or additional rate tax relief through your self-assessment tax return.
It can be difficult to decipher if you’ve received the right amount of tax relief, meaning that you might want to seek advice from an accountant to ensure you’re getting your correct entitlement. You can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
If you’re completing your tax return yourself, you’ll need to state the amount you have paid into your pensions on page TR4 of the tax return. You should include the amount you’ve paid in that includes the basic rate tax relief of 20% (unless you contribute by salary sacrifice in which case you do not complete this box). However, employer contributions shouldn’t be included in this figure. You then receive the additional tax relief at the higher rate either as a rebate or reduction in the amount of tax you pay.
If you don’t usually complete a self-assessment form or you don’t want to wait for the higher rate tax relief , you should request your coding notice for the current tax year to be updated (see above).
What are your pension allowances?
There is a limit on the amount you can contribute to a pension in each tax year and still benefit from tax relief, known as the ‘annual allowance’’. This is £60,000 or 100% of your earnings, whichever is lower. If you earn more than £200,000, the limit is lower. If you earn £3,600 or less (or nothing at all) then the maximum you can pay into a pension is £3,600 a year, including tax relief, so your personal contribution cannot be more than £2,880.
If you’ve previously accessed a pension flexibly and taken any income from that, as opposed to just your tax free cash, then the allowance drops to £10,000 a year, and becomes known as the Money Purchase Annual Allowance. Find out more about this in our guide What is the Money Purchase Annual Allowance?
Previously you’d also need to consider the Lifetime Allowance, which is the amount you could build up in your pension over your lifetime in pension(s). However, this was abolished from 6 April 2023 so no longer applies.
Read more about your pension allowances so you don’t fall foul of the rules in our guide How do pension allowances work?
Can you ever claim tax relief on more than your Annual Allowance?
If you haven’t made use of your pension allowances in the previous three years (but have been a member of a pension scheme), you may be able to pay more than your annual allowance into your pension, and receive tax relief at your marginal rate. This is known as ‘carry forward’, and can be a useful way of increasing your pension savings and benefiting from tax relief. Find out more in our article Pension carry forward explained.
Verinder said: “You can pay more than £60,000 in to use the brought forward allowances and maximise the amount in the pension, but the contribution is treated as paid in the current year – therefore depends on your tax position in the year of payment. You need to have the income in the current year to utilise the tax relief from these additional contributions.”
This can be a useful rule to make use of as you approach retirement in particular, as it’s unlikely that most of us will have made full use of our £60,000 pension allowance each year. If your salary has increased substantially, you might want to pay a lump sum into your pension, for example. However, bear in mind that you cannot pay more than you earn in a single tax year into your pension.
Can other people pay into my pension and will I receive tax relief on this money?
Other people can pay into your pension on your behalf, and you will receive tax relief on these contributions. However, bear in mind that the contribution will be treated as if it has come from your earnings. You cannot claim higher rate tax relief if the person contributing on your behalf is a higher rate taxpayer – only if you fall into this category.
For example, let’s say you pay £2,000 into your personal pension after tax and your partner pays in a further contribution of £2,000. Basic rate tax relief of £1,000 is added to give a total contribution of £5,000. If you’re a higher rate taxpayer can claim an additional 20% tax relief on top of basic rate relief at 20%, giving you an extra £1,000 in tax relief.
Where to go for further help
If you are unsure about whether you’re receiving your entitlement to higher rate tax relief, or need further help claiming this relief, as previously mentioned, it may be worth speaking to an accountant who belongs to. You can find an accountant by searching on the Institute for Chartered Accountants in England and Wales website.
The Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement, but this will not include how to claim higher rate tax relief.
If you want tailored advice on your pension, you might want to speak to an independent financial adviser. They can recommend the best option for you based on your individual circumstances.
You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.