What is pension tax relief?
Pension tax relief is the money you receive on top of your regular contributions by the government as an incentive for paying into a pension. Tax benefits are however, subject to change, and depend on the individual’s circumstance.
There are two types of tax relief you can get:
- net pay tax relief
- relief at source (RAS)
Relief at source is when you will get 20% on the gross amount of any personal contributions, so for every £1 you pay the government with give you 25p, and this is done automatically by your pension provider.
Net pay tax relief or ‘salary sacrifice’ is only available when you’re paying in directly from your wages pre-tax and your tax relief is obtained when you make a contribution.
Find out more about pension tax relief.
The government provide tax relief on payments as an incentive for people to think about their future retirement. By promoting this, the government is aiming for long-term financial security to work alongside the state pension.
What is higher rate pension tax relief
As a higher rate taxpayer in a relief at source scheme, you are entitled to more tax relief than the basic rate. You’re able claim back a further 20% of your payments, so it can look something like this –
How to claim higher rate tax relief on pension contributions
If you are a higher rate taxpayer, you can claim back a further 20% of your payments, but it’s something you need to do through your self assessment tax return which you must complete yearly with HM Revenue and Customs (HMRC).
Can I claim higher rate tax relief for previous years?
If you need to claim tax relief on payments for previous years, you must have been paying higher rate tax for those years. There is a time limit for how many years you can claim back on – you can only claim back up to four years’ worth of tax overpayments through a claim for overpayment relief.
If someone else pays into my pension, who gets the tax relief?
If the provider agrees, anyone can pay into your pension. But remember - the member gets the tax relief, not the payer. So, if you pay into your child's pension, they get the tax relief, and it doesn't affect the amount of higher or additional rate tax you pay.
If someone else pays into your pension, remember to claim any higher or additional rate tax relief you're due. Also, remember to tell them how much annual allowance you've already used, as you'll be liable for any annual allowance charge due if their contribution means a charge is payable.
What are the pension tax relief rules and limits?
There are two limits when it comes to your pension contributions. Your annual allowance which covers how much you can pay into your pensions, across the board without paying a charge, and your relevant UK earnings.
Tax relief is available on contributions up to your UK earnings, or £3,600 if your earnings are lower. This includes your tax relief itself, so it's always worth checking what that could look like. Our pensions can only accept contributions that are eligible for tax relief. Your circumstances can change your annual allowance, so if you’re unsure what your annual allowance is you can check on the gov.uk website.