Tax relief on pension contributions

When you add money to your pension, the government does too. The government top-up comes in the form of pension tax relief. It’s a way for the government to encourage people to save for their retirement.

If you’re a UK taxpayer and under the age of 75, every tax year you may be able to get tax relief on pension contributions up to 100% of your earnings, or on contributions up to the government-set annual allowance, whichever is the lower of the two. The annual allowance is currently £60,000.

How does pension tax relief work?

Everyone, whether you’re working or not, is entitled to get basic rate tax relief at 20% from the government when you make contributions to your pension. So, for example, let’s say you wanted to have a total of £1,000 contributed to your pension. Because of tax relief, you’d only need to add £800 (which has already been taxed) and the government would add £200 (which is 20% of the gross amount). Another way of looking at it is that the government effectively tops up whatever you put into your pension by 25% (up to an annual limit).

Tax relief is linked to the highest band of income tax you pay. This means that if you’re a higher-rate or an additional-rate taxpayer you could claim extra tax relief on top of the basic 20%. Higher-rate taxpayers can claim a further 20%, while additional-rate taxpayers can claim an extra 25%.

If you live in Scotland, the income tax bands work differently, so the amount of tax relief you’re able to claim is slightly different. Find out more about tax relief in Scotland.

Remember, your tax relief counts towards your total contributions and therefore affects your annual allowance – so don’t forget to factor this in when you’re calculating how much to put into your pension each year.

How do I get my pension tax relief?

How you get the tax relief will depend on the type of pension scheme you’re in and how much income tax you pay.

You’ll automatically get the 20% basic rate tax relief if:

• you’re part of a workplace pension where your pension contributions are deducted from your pay before income tax – this means that you get the tax relief there and then. This is known as a ‘net pay’ arrangement.
• your pension provider claims the 20% tax relief on your behalf and adds it to your pension pot. This is known as a ‘relief-at-source’ arrangement. All private pensions, and some workplace pensions, are relief-at-source pensions.

If you have a Nutmeg pension we automatically claim the basic tax relief on your behalf and add it to your pension pot, so you don’t have to worry about this.

You’ll have to personally claim tax relief on pension contributions if:

• you’re a higher-rate or additional-rate taxpayer and you want to claim the extra tax relief you’re entitled to
• someone else pays into your pension and you’re not part of a relief-at-source scheme
• your pension scheme is not set up to automatically give you the tax relief.

You can claim any tax relief you’re due through your annual tax return or by notifying HMRC and completing a tax review form.

Paying a lump sum into a pension fund

You can choose to pay a lump sum into your pension at any point, even if you’re already making regular contributions. But don’t forget that you can only claim tax relief on amounts of up to 100% of your earnings for that year or up to the annual allowance, whichever is lower. So, it’s important to keep track of your contributions throughout the year to ensure that if you want to pay a lump sum you don’t go over your tax relief maximum amount.

You may also be able to carry forward any unused allowance from the previous three years in order to maximise the tax relief you receive on the lump sum you want to pay in. To do so, you have to meet certain eligibility requirements. Learn more about carry forward.

Salary sacrifice and pension tax relief

Some employers offer their employees ‘salary sacrifice’ arrangements. Salary sacrifice is when an employee agrees to give up part of their salary in return for their employer giving them the option of non-cash benefits. Non-cash benefits can include pension contributions.

A salary sacrifice arrangement benefits employees because it reduces their total income – so they pay less tax and national insurance. It also benefits employers as they can reduce their national insurance contributions.

You could have a salary sacrifice agreement with your employer where they make increased contributions to your pension on your behalf. If you do have this salary sacrifice arrangement, tax relief can’t be claimed on those contributions because you’ve already benefited by being taxed on a lower amount of salary as a result of the salary sacrifice.

Salary sacrifices, and subsequent reduced pay, can impact on future calculations of pensions, redundancy pay, statutory maternity pay and other employment-related benefits. It’s important that you understand the potential impacts of salary sacrifice, how they link with employment law, and how they may affect your future, before deciding to enter into a salary sacrifice arrangement.

Claiming tax relief on pension contributions for previous years

If you don’t get your tax relief automatically or you’re a high earner and didn’t claim your extra entitlement to tax relief, you’re able to back-date tax relief claims for the previous four years. If you believe you need to claim outstanding tax relief you should contact your local tax office or HMRC.

Tax relief after you’ve started to withdraw from your pension

In some situations, you may choose to continue to contribute to your pension after you’ve started to flexibly take income from it. If this is the case, you should be aware that tax relief on these contributions has a reduced annual allowance, known as the Money Purchase Annual Allowance (MPAA). The MPAA for the current tax year is £10,000.