You know one of the brilliant things about saving for later life with a pension? The government rewards you for it. If you pay tax, they’ll give some of it back to add to your pension pot. It’s called “tax relief”.
But, tax relief depends on your individual circumstances. And remember, you won’t usually be able to access your pension until age 55 (rising to 57 in 2028). This handy guide can give you some tips, but it’s not personal advice. If you want personal advice, you can get independent financial advice through Unbiased. Or get free guidance from the government’s Pension Wise service via MoneyHelper.
How much do you get?
The amount of tax relief you get on your pension contributions depends on your “tax band” – basic, higher or additional.
Tax relief is given at the highest rate of income tax that you pay. But there are limits to how much relief you can get, as you’ll see below.
Say you pay tax at the basic rate, which is 20% in the 2023/24 tax year. If you put £80 into your pension, the government will top it up with an extra £20, making a total of £100.
If you pay tax at 40% (the higher rate) or 45% (the additional rate), you can claim an extra £20 or £25 on top. This means the £100 in your pension will have cost you only £60 or £55.
Your pension provider will claim the basic rate tax for you and add it to your pension pot. If you pay tax above the basic rate, you’ll need to claim the extra tax relief from HMRC through your self-assessment tax return. If you’re employed, and your workplace pension provider takes your pension contributions from your salary through the payroll, this will all be done automatically for you.
One other thing: tax relief rates can be different in Scotland and England, as shown below. Wales and Northern Ireland currently follow England tax rates, but they could change in the future.
| Band | England Taxable Income | English Tax rate | Scotland Taxable income | Scottish Tax rate |
|---|---|---|---|---|
| Personal Allowance | Up to £12,570 | 0% | up to £12,570 | 0% |
| Starter rate | X | X | £12,571- 14,732 | 19% |
| Basic rate | £12,571- £50,270 | 20% | £14,733- £25,688 | 20% |
| Intermediate rate | X | X | £25,689- £43,662 | 21% |
| Higher rate | £50,271 - £125,140 | 40% | £43,663- 125,140 | 42% |
| Additional/ top rate | Over £125,140 | 45% | Over £125,141 | 47% |
What’s your maximum tax relief?
You’re welcome to put away as much of your earnings in your pension as you want – there’s no limit. There is a maximum amount on which you’ll get tax relief though.
Say your annual UK income is between £3,600 and £200,000. The most you can put into your pension each year and claim tax relief for is either your total earnings, or £60,000, whichever is lower.
If your annual UK income is £3,600 or less, the maximum amount you can claim tax relief on is £3,600.
What if your contributions go over your limit? Then you may have to pay tax on the excess amounts.
Is your situation different?
The above rules don’t apply if you’re over 55 and have already taken money out of your pension pot. In that case, the amount you can add to your pot each year and still get tax relief on shrinks to £10,000.
The amount of tax relief you could get with your pension contributions is also different if you earn over £260,000 including money you’ve added to your pension, or if your income is more than £200,000 excluding money you’ve put into your pension.
Find out if you can claim any extra tax relief, and how much here. For everything you need to know about tax, visit www.gov.uk or ask a tax specialist or independent financial adviser.
How do you get your tax relief?
It depends on the type of pension scheme you’re in. Here’s how it works:
Workplace pensions
If you pay into a workplace pension, you get tax relief:
Either (a):
When your employer takes contribution amounts from your wages before taking off tax from your pay. This “net pay arrangement” means your tax relief is at the highest tax rate you pay, so you don’t have to claim back from HMRC any higher/additional rate tax because you already have a lower tax bill. To see if your relief works this way, check your scheme booklet or ask the person in charge of your workplace pension scheme.
Or (b):
When your employer takes your pension contribution from your pay after they’ve taken off tax, but before paying you. Your employer then pays this amount for you to your pension provider. This is called “relief at source”.
Other types of personal pension schemes use this method as well. After your employer tops up your pension, your provider claims back basic rate tax at 20% from HMRC and adds it to your pension pot too.
Here’s an example. Suppose your employer takes £80 from your net pay (after deductions) and gives it to your provider. Your provider would claim back an extra £20 from HMRC. Then you’d get a total of £100 paid into your pension.
Remember, if you pay a higher tax rate, you can claim more tax relief. Usually, you do this through your self-assessment tax return, but HMRC could give you the relief by changing your tax code.
Or (c):
If you're paying into your pension through something called a “salary sacrifice” arrangement. Here, you choose to sacrifice part of your salary in exchange for non-cash benefits, such as your employer making larger contributions to your pension scheme. This way, not only do you get tax relief but you also save on your National Insurance contributions.
Do you have another type of pension?
What happens with a personal pension, self-invested personal pension or stakeholder pension? Usually, your tax relief comes after you’ve paid in money.
As with a workplace scheme, your pension provider claims back basic rate tax at 20% from HMRC, and then pays this into your pension.
This is how you’d get tax relief if you were to open a Virgin Money Personal Pension.
Remember, the value of investments can go up and down, so you may get back less money than you put in. Tax depends on your individual circumstances and the regulations may change in the future.