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What is tax relief?

The taxman encourages pension saving by giving tax incentives, commonly known as tax relief. Tax relief is given in 2 ways.
Each time you save into your plan, you’ll receive extra contributions from the taxman which will boost your retirement savings. Everyone who pays tax will receive basic rate tax relief which means a 25% boost on top of your contributions.
If you’re a higher rate or additional rate taxpayer you’ll receive a reduction in your tax liability. This is the difference between your basic rate tax relief and the higher or additional rate of income tax you’ll pay.
As a reminder, here are the current income tax rates: 
20% for basic rate taxpayers 
40% for higher rate taxpayers 
45% for additional rate taxpayers
These rates are based on UK income tax bands and exclude Scotland.      

The government encourages pension saving by giving tax incentives, commonly known as tax relief.

Tax relief is given in 2 ways.

  • Each time you save into your plan, you’ll receive extra contributions from the government which will boost your retirement savings. If you receive basic rate tax relief this means a 25% boost on top of your contributions.
  • If you’re an intermediate rate (Scottish taxpayers only), higher rate or additional rate taxpayer you could be entitled to claim more tax relief through a self-assessment tax return or by contacting your local tax office.

As a reminder, here are the current income tax rates for England, Wales and Northern Ireland: 

  • 20% for basic rate taxpayers 
  • 40% for higher rate taxpayers 
  • 45% for additional rate taxpayers

And for Scotland:

  • 19% for starter rate taxpayers
  • 20% for basic rate taxpayers
  • 21% for intermediate rate taxpayers
  • 41% for higher rate taxpayers
  • 46% for top rate taxpayers 

How does tax relief work?

For England, Wales and Northern Ireland

You pay Basic rate tax
relief added
Total contributions You claim
additional
tax relief
Icon: You pay + Icon: Basic rate tax relief added = Icon: Total contributions + Icon: You claim additional tax relief
Basic rate taxpayer £80
£20 £100 -
Higher rate taxpayer £80
£20 £100 £20*
Additional rate taxpayer £80
£20 £100 £25*

*The actual amount you claim will depend on how much of your income is taxed at these rates. Tax treatment depends on individual circumstances and could change in the future.

For Scotland

You pay Basic rate tax
relief added
Total contributions You claim
additional
tax relief
Icon: You pay + Icon: Basic rate tax relief added = Icon: Total contributions + Icon: You claim additional tax relief
Starter/basic rate taxpayer £80
£20 £100 -
Intermediate rate taxpayer £80
£20 £100 £1*
Higher rate taxpayer £80
£20 £100 £21*
Top rate taxpayer £80
£20 £100 £26*

*The actual amount you claim will depend on how much of your income is taxed at these rates. Tax treatment depends on individual circumstances and could change in the future.

How can I maximise my tax relief?

Pay more in to your plan

The more you pay into your plan, the more help you’ll get from the government.

And if you’re paying a higher or additional rate of income tax, paying more into your pension means you could benefit from the extra tax relief that’s available. You can claim this extra tax relief through your tax return.

Claim any extra tax relief through your tax return

Most workplace pension schemes are set up on the basis that you’ll need to claim your extra tax relief through your self-assessment tax return. You have up to 4 years to claim any tax relief and there’s more information about how to do this at HM Revenue & Customs (HMRC).

However, some employers set their scheme up differently and will deduct contributions from your salary before they deduct the income tax. If this is how your employer’s scheme is set up, you’ll automatically receive the right level of tax relief without having to claim anything back from HMRC.

Reduce your child benefit tax charge

If you or your partner earn more than £50,000 and are claiming child benefit, you’ll normally have to pay back some or all of any child benefit through the high income child benefit tax charge.

For every £100 you or your partner earn which is over £50,000, you’ll pay a 1% tax charge. And if your income is more than £60,000 a year, the tax charge will be the same as the amount of child benefit you’ll receive.

Making a pension contribution could help boost your savings, at the same time as reducing your income, which means you’ll keep some or all of your child benefit.

Let’s have a look at Tony and Lucy’s story

Tony has taxable income of £58,000 and his wife Lucy has no income. They have two children and receive £1,820.00 each year in child benefit.

As Tony's income is £8,000 over the limit (£50,000), he’ll receive an 80% tax charge of £1,820.00 = £1,456.00.

As a couple, the overall value of the child benefit they’ll receive will reduce to £364.00 (£1,820.00 - £1,456.00).

Case study: Tony and Lucy

If Tony paid £6,400 (net) into a pension plan each year, when this is grossed up it will be £8,000. It also means that:

  • Tony’s net income has been adjusted down to £50,000, so he doesn’t need to pay any charge on the child benefit, saving him £1,456.00..
  • Assuming Tony’s contribution comes from his higher rate tax band, he’ll also be able to claim an additional £1,600 in tax relief (20% of £8,000) through his tax return.

In summary, Tony could make a pension contribution of £8,000, but it will only cost him £3,344.00 (£6,400 - £1,456.00 - £1,600).

Case study - Child Benefit as a couple

Are there limits on what I can pay in?

Annual allowance

The government has set a limit on the amount of pension contributions you can make each year before you have to pay a tax charge. This is called the annual allowance. The annual allowance for the 2020/21 tax year is £40,000, which means you, and anyone paying on your behalf (for example your employer) could contribute £40,000 before a tax charge may apply.

If you haven’t used all your annual allowance in the last three tax years, this is unused annual allowance and can be added to the annual allowance available to you in this tax year.

If however, you have taxable income greater than £240,000, you'll have your your annual allowance for that tax year restricted.  This means that for every £2 of income you have over £240,000, your annual allowance is reduced by £1. Your reduced annual allowance is rounded down to the nearest whole pound.

The maximum reduction will be £36,000, so if you have an income of £312,000 or more you'll have an annual allowance of £4,000. If you're caught by the restriction, you may have to reduce the contributions paid by you and/or your employer or an annual allowance charge will apply.  If you think you might be affected by this you should speak to a financial adviser.

Lifetime allowance

There's a limit on the amount you can build up in all of your pension plans when you start taking your retirement savings. It's set by the government and it's called the lifetime allowance.

The lifetime allowance for 2020/21 is £1,073,100. If you take any of your savings which take you over this limit, you may be subject to a lifetime allowance charge.

Money purchase annual allowance

If you're over age 55 and have already taken some of your retirement savings, your annual allowance may be restricted to the money purchase annual allowance (MPAA). This means your annual allowance for contributions into defined contribution arrangements would be reduced from £40,000 to £4,000 a year.

Find out more about the money purchase annual allowance.

Make a single contribution

You can apply to make a single contribution into your pension plan online.

Use our secure online form

 

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0370 850 1991