Tax Relief On Pensions: What Is Pension Tax Relief In The UK?

It goes without saying that everyone wants to get the most money possible out of their pension. Whether that’s through maximising their own contributions or ensuring that they pick the right pension investment options, there are plenty of ways to grow your pension and make it work for you.

And the good news is that this is much easier than you might think. Because, on top of all your own contributions, you’ll also be rewarded with what’s known as UK pension tax relief, providing you with a bigger pension pot come retirement.

But what is tax relief, and how does it benefit the money you put in?

To explain this complex topic, the team at Blacktower have broken down everything you need to know about UK tax relief, including how much tax relief you’re eligible for, and how to claim it if you’re a higher tax earner.

What is tax relief for pensions?

In its simplest form, UK pension tax relief is a financial reward provided by the government based on the amount of money you contribute to your pension.

This reward can be seen as matching the current 20% income tax you would otherwise have to pay on your earnings if you didn’t put it in your pension, or as an additional 25% of the money you put in.

For example, if you were to contribute £100 to your pension pot, the government would add an additional £25 on top of this. This ensures your pension is topped up properly and is designed to encourage you to put more in to get the most out of your available tax relief.

No matter if you’re an employee or self-employed, tax relief happens automatically and is handled entirely by your pension company, meaning all you have to do is contribute the amount that suits you and enjoy the tax relief rewards associated with it.

Can I claim additional tax relief?

In the majority of cases, you cannot claim more tax relief than what the government pays out unless you fall into the higher taxpayer and additional taxpayer brackets. These brackets are defined as anyone who earns more than £50,270 and £150,000 respectively and are thus paying a higher income tax.

As tax relief acts as a form of income tax benefit, those who fall under this category can claim back an additional 20% or 25% in tax relief through a self-assessment tax return form delivered to HMRC – though it’s important to know that this tax relief will be given directly to you, rather than placed into your pension.

Is there a limit on your tax relief pension contributions?

While you can contribute as much as you want to your pension each year, there is an annual limit set on the amount of tax relief you can receive. The base limit is set at £60,000, after which, no tax relief is applied.

What are the different types of tax relief?

When it comes to tax relief on pension contributions, there are three main types you need to be aware of. Each of them provides its own version of tax relief benefits, but differs in its application, meaning one type might be better suited to you than the others.

Netpay tax relief

Also known as net pay, workplace tax relief functions by having you make your pension payment before you pay income tax, meaning you technically earn less overall each month.

However, because this payment reduces your income before tax, you will pay less income tax in total, the equivalent of which will be how much you would save in tax relief. So, while the government don’t directly provide you with additional funds, you end up saving the same amount as you would with other tax relief methods.

Relief at source

Also called relief at source, this method of tax relief is the same type we discussed earlier. You contribute a satisfactory amount to your pension each month, and in return, your pension provider will ensure that you receive the 25% tax relief payment on top of this.

Pension salary sacrifice tax relief

The most unique of the three tax relief options you can choose, pension salary sacrifice tax relief is rather uncommon. An agreement made between you and your employer, with salary sacrifice, you refute all forms of tax relief by having your employer make your entire pension payment for you.

However, while this might sound like a negative, much like net pay, you end up paying less tax overall al on your monthly payment while taking home more of your salary overall.

This makes pension salary sacrifice a feasible option for those on a high income who want more control of their finances, though it should be avoided by anyone who earns below or around the personal allowance threshold as it may result in a reduced salary overall.

Other things to know about tax relief in the UK

Although it might sound like tax relief only applies to those earning salaries above the annual personal allowance limit of £12,570, you can still make a tax relief claim on a low income or if you don’t pay income tax.

If you don’t pay income tax, savings up to £2,880 can be made with tax relief. And if you are employed but on a low salary, you can still claim back 100% of your earnings in tax relief using the relief at source payments.

It should also be noted that tax relief is not the same as the 25% tax-free allowance, which makes the first 25% of your pension tax-free when you withdraw it but is unrelated to pension contributions.

Claiming UK tax relief while overseas

If you plan on living overseas once you retire, you may be wondering if it’s still possible to claim UK tax relief on your pensions.

The answer is a definitive yes, though in most cases you will be required to transfer your pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) or Qualified Non-UK Pension Scheme (QNUPS).

For more information on this, why not speak to the Blacktower team about our international pension services?

Hopefully, you should now have a better understanding of how tax relief works in the UK. And for more information on UK pensions, you can visit our pension hub [where we cover everything from pension basics to what happens to your pension when you die .

And here at Blacktower, we provide far more than pension advice. Whether you need wealth management or assistance in tax planning, contact our team today to see how we can help.

This communication is for informational purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained  in this communication is correct, we are not responsible for any errors or omissions.