pensions & retirement

Tax relief on pensions

Learn how each pension contribution you make is given a boost - in the form of tax relief.

What is pension tax relief?

Whenever you make pension contributions, that money is given a boost from tax relief.

The relief is equal to your marginal income tax rate - so basic rate taxpayers get 20% relief, higher rate taxpayers get 40% and additional rate taxpayers get 45%.

It’s a great uplift to your total pension contributions. For example, if you are a basic rate taxpayer and you pay £100 into your pension, the total contribution - including tax relief - is £125. That's a 25% top up.

The Government offers tax relief to encourage you to put that money away for the future, instead of spending or saving it now.

How does pension tax relief work? 

Tax relief is based on your income tax band.

If you are a basic rate taxpayer (earning up to £50,000), you will get 20% tax relief. This translates to a 25% boost on each pension contribution.

Higher-rate (40%) and additional-rate (45%) taxpayers may have to claim the additional tax relief on their Self Assessment tax return – unless their employer does this automatically through a ‘net pay’ arrangement.

How much tax relief can I claim in 2021-22? 

Tax relief is available on pension contributions up to 100% of earnings, capped at £40,000 per year.

That means a maximum annual contribution of £40,000 would be made up of a £32,000 personal contribution and £8,000 in tax relief – 20% of the £40,000 total. 

If you are a non-earner, you still have an annual allowance of £3,600 for pension contributions - £2,880 of your own money, and £720 added through tax relief.

Tax relief rates

Tax relief rates are the same as your income tax rate. In England these are:

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

Income tax in Scotland is structure differently. Tax relief rates in Scotland are: 

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

How do I claim pension tax relief?

The basic rate of tax relief is usually claimed for you by your pension provider. You only need to claim tax relief if you are a higher-rate taxpayer. 

You can claim back any additional tax relief through your Self-Assessment tax return. 

Tax relief on workplace pension schemes 

Some workplace pension schemes use a ‘net pay’ arrangement. If you are a member of such a pension scheme, you do not have to claim back your additional tax relief. Your pension scheme will claim it automatically for you. 

Pension tax relief for high earners

The amount you can contribute to your pension may be reduced if you are a very high earner.

If you have an income over £200,000, you may be subject to the tapered annual allowance. This reduces the amount you can contribute each year by £1 for every £2 over £240,000 you earn. Once an individual’s earnings reach £312,000 or above, the annual allowance is capped at £4,000.

Find out more about the tapered annual allowance

Pension tax relief FAQs

The basic rate of 20% tax relief is still applied if someone other than your employer pays into your pension. 

The amount of additional tax relief you can claim is based on your rate of income tax – rather than the contributor’s. If you are higher-rate taxpayer, you can claim back additional tax relief on someone else’s contribution to your pension. 

If you pay money into someone else’s pension, the contribution will receive the basic rate of 20% tax relief. 

You personally cannot claim back any tax relief. However, the recipient could claim back additional tax relief on your contribution if they are a higher-rate taxpayer.

The maximum amount you can contribute to your pension in a tax year is £40,000, or 100% of your annual income – whichever is lower.

You can only contribute more than this if you qualify for ‘carry forward’. 

Carry forward allows you to use any unused allowance you have from the previous three years. You can only qualify or carry forward if you have:

  • unused annual allowance from the past three years.
  • already contributed your full annual allowance in the current tax year.
  • been a member of a pension scheme in each year you are carrying forward from.
  • earned at least the amount you are contributing in the current tax year.

You can receive 40% on pension contributions if you are a higher-rate taxpayer (anyone earning over £50,000 in a tax year). 

The first 20% is usually claimed automatically by your provider. You can then claim the additional 20% via your self-assessment tax return. 

Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future. If you are uncertain about the tax treatment of the products you should contact HMRC or seek independent tax advice.

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