Tax is rarely a relief so the term ‘tax relief’ can often confuse, especially when we’re told it’s one of the best things about pensions.
Here, we explain how pension tax relief works and why, provided you stick within your pension allowances, it can give your retirement savings a valuable boost.
- What is pension tax relief?
- How pension tax relief works?
- How do I claim pension tax relief?
- Workplace pensions and tax relief
- Can non-taxpayers claim tax relief on pension contributions?
- How much pension tax relief can I benefit from in 2023/24?
- What happens if I’ve already started taking benefits from my pension?
- Accessing your pension
What is pension tax relief?
Pension tax relief essentially means that some of the money that you would have paid in tax to the government goes into your pension instead. What this means in practice is that when you or your employer pays into your pension, the government will also chip in.
How pension tax relief works
The amount of pension tax relief you can claim is tied to your rate of income tax.
- Basic-rate taxpayers get 20% pension tax relief
- Higher-rate taxpayers can claim 40% pension tax relief
- Additional-rate taxpayers can claim 45% pension tax relief.
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 do I claim pension tax relief?
Most UK taxpayers automatically get tax relief on pension contributions at the basic rate of tax which is 20%. So, if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax.
If you’re a higher rate taxpayer who pays income tax at a rate of 40%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. You’ll usually get 20% of this back automatically and then will have to claim the remaining 20% through your tax return or by calling HMRC. The same goes if you’re an additional rate taxpayer, only you can claim an additional 25% on top of the usual 20%, giving you total pension tax relief of 45% (or in other words, you can effectively pay £100 into your pension for only £55). Find out more about claiming higher rate tax relief in our guide How do I reclaim higher rate pension tax relief?
Workplace pensions and tax relief
If you’re in a workplace pension scheme, then your employer will have chosen one of two different methods to apply pension tax relief to your contributions.
Some employers have what’s known as a ‘net pay’ arrangement so that your pension contributions are taken from your salary before income tax is paid on them, and the pension scheme claims back tax relief at your highest rate of income tax, which means you may not have to fill in a tax return, even if you are a higher or additional rate taxpayer. Check with your scheme provider if you’re not sure whether they do this.
Certain employers, as well as any personal or private pension scheme, will have what’s called a ‘relief at source’ arrangement. In this case, they will deduct your 80% pension contribution and send it to your pension scheme after taking income tax first. Your pension scheme then claims the remaining 20% directly from the government. In this case, you will have to contact the tax office or complete a self-assessment tax return to claim your extra relief if you are a higher or additional rate taxpayer.
Can non-taxpayers claim tax relief on pension contributions?
Yes, if you’re not earning enough to pay income tax, you can still get basic rate pension tax relief on contributions up to £2,880 each year. So if for example, you’re in a relationship and taking a career break, your partner might decide to make pension contributions on your behalf until you start work again.
If the maximum £2,880 is paid into your pension over the year, this means that once tax relief is added, you’ll end up with £3,600 of retirement savings. Find out more in our article Can my husband or wife pay into my pension?
How much pension tax relief can I benefit from in 2023/24?
You’re only entitled to tax relief on a certain amount of pension contributions each tax year, known as your Annual Allowance. For the 2023/24 tax year, the government has set the Annual Allowance at £60,000.
This means that you can earn tax relief on pension contributions of up to 100% of your earnings, or £60,000 a year, whichever is lower, across all the pensions you have. If you’re earning £80,000 a year for example, that means you’d be able to pay up to £60,000 of this into your pension.
The £60,000 limit covers any contributions you or your employer make and includes pension tax relief.
Any pension payments you make over the £60,000 threshold will be subject to usual income tax rates.
However, you can carry forward any unused Annual Allowances from the previous three years, as long as you were a member of a pension scheme during those years.
If you’re on a very high income, your Annual Allowance reduces. If your income added to any pension contributions you or your employer make (known as your ‘adjusted income’) is more than £260,000, then for every £2 it goes over this limit, your Annual Allowance goes down by £1. The minimum reduced Annual Allowance you can have is £10,000.
Previously, you would have also needed to consider the Lifetime Allowance, which was the maximum you could save into your pensions without having to pay any extra tax charges when you take money out of them. However, the Lifetime Allowance was abolished on 6 April 2023, so it no longer applies.
You can find out more about how the Annual Allowances work in our article Understanding your pension allowances.
What happens if I’ve already started taking benefits from my pension?
If you’ve started taking an income from your pension, but still want to keep paying into it, the good news is that you are still able to benefit from pension tax relief on future contributions. However, the amount you can pay in each year, your Annual Allowance, falls to £10,000 and becomes known as the Money Purchase Annual Allowance (MPAA).
You can find out more about this in our article What is the Money Purchase Annual Allowance?
Accessing your pension
Bear in mind that you won’t be able to touch the money in your pension, including any tax relief on your contributions, until you reach the age of 55, rising to 57 by 2028. Find out more about this in our guide Retirement age: When can I retire?
It’s also worth remembering that pension tax rates and benefits can change and are dependent on your personal circumstances so there are no guarantees that current rules will continue to apply in future. If you’re not sure about investing or how pensions work, it can be a good idea to seek professional independent financial advice.
You can find a local financial advisor on VouchedFor or Unbiased.co.uk, 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.