In 2017-2018, the projected gross pension tax relief was £38billion, up from £37 billion in 2016-2017. Since then, there has been a steady rise in pension tax relief. More and more people have been considering investing in pension schemes, with ‘nudge economics1’ being implemented by most states.
The general rise has also been the result of the introduction of the Auto-Enrolment. It increased the number of individuals putting their hopes and dreams into a pension pot and, ultimately, the total amount saved into workplace pensions.
If you’re new to the pensions world, you might not have an idea what this is all about. Well, there’s no need to sound the alarm.
Pensions are investment funds that allow you to save up for retirement, and about 70& of UK taxpayers receive tax relief on their pension contributions – meaning that the government efficiently adds cash to your pension savings.
Now that I have your attention,
Here’s a comprehensive guide on pension tax relief.
How Pension Tax Relief Works
If you’re considering starting a pension pot, it’s crucial to understand how pension tax relief works. According to the HMRC2 (Her Majesty’s Revenue and Custom), since January 2020/21, one can receive tax relief on pension contributions of up to £40,000 or 100% of your income (it depends on the lower amount). If you make any personal pension contributions above the set limit, the HMRC taxes you at the highest rate of tax you pay.
At the basic rate taxpayers receive a 25% tax top-up – meaning that if you paid £100 into your pension pot, HMRC would automatically add another £25, bringing your total contributions to £125.
If you’re a higher and additional rate taxpayer, you can claim a further 25% and 31% respectively via the Self-Assessment Tax Returns form or write to your local tax office. It would be best if you put down the gross personal contributions you’ve made (your net individual contributions plus 20% tax relief) on the Assessment form.
If your gross income is less than £3,600 yearly or if you don’t earn anything, the maximum amount you can contribute to your pension savings within the tax threshold is £2,880, bringing your total annual contribution to £3,600, when tax relief is considered. You can use the pension tax relief calculator to see the amount of tax relief you’re entitled to.
Workplace Pensions and Tax Relief
Workplace pensions are a great way to save for later life, and the Pension Tax Relief calculator can help you figure out how much your employees stand to benefit from this extension.
Her’s the kicker:
The pension tax relief is going to be good news for both employers who have been saving up in case of an emergency and those just starting their careers–whether that means they’re about to graduate college or if they’ve been working a regular job with no benefits.
Pension Tax Relief for Non-taxpayers and Low Earners
The Pension Tax Relief for non-taxpayers and low earners is going to be a lifesaver, as it provides relief on contributions. It’s also good news for those who earn less than the tax threshold–in 2019 that starts at £12,000 per year earned.
Tax Relief on Pension Contributions
The Pension Tax Relief on contributions is good for up to $280,000 in employer contributions per year.
Pension Tax Relief Calculator
The Pension Tax Relief calculator tells you how much your employees stand to benefit from the extension. This is especially helpful for those businesses that have a lot of turnovers and need to find new hires every year, but also want their staff to benefit as well.
And the best part?
If they are rehired on or before December 31st, 2019, then no tax will be paid on anything up to £649,000 in income per person ( £699K married couple). However, if they are hired after January 2020, this limit drops down significantly!
The Current Tapered Tax Relief Allowance
Recently, the government introduced a new tapered allowance that impacts the pension relief limits of high-income earners – meaning that if your adjusted income (your income plus pension contributions) exceeds £240,000, your annual pension tax relief limit is decreased.
The amount tapers down to £4,000 for salaries of £312,000 or more. Here’s a table showing how the tapered allowance works:
|Earnings||New Annual Allowance|
|Up to £240,000||£40,000|
Do You Get Tax Relief On Pension Contributions?
When you’re paying into your pension pot, you receive tax relief on any contributions you make. It’s at the highest rate of income tax that you pay, as long as the total gross pension contributions paid into your pension plan by you, your boss or the government, doesn’t exceed your yearly earnings and the annual allowance (the lower amount).
How Much Pension Tax Relief Can You Claim?
Currently, you can claim tax relief on your pension contributions of up to £50,000 per annum and £1.5 million over your lifetime.
How Can One Claim Higher Tax Relief on Pension Contributions?
If your provider deducts your pension contributions from your net pay, after a tax deduction, and you’re a higher rate taxpayer, you can choose to claim your tax back using the Self-Assessment tax returns form or write to the HMRC – if you don’t fill in a tax return.
How Many Years Can You Claim Back Pension Tax Relief?
Here’s a detailed guide on the years you claim back tax relief:
|Age||The amount that one qualifies for tax relief|
|22 – 29 years||15% of net relevant earnings|
|30 – 39 years||20%|
|40 – 49 years||25%|
|50 – 54 years||30%|
|55 – 59 years||35%|
|60 and over||40%|
Pension plans are a fantastic way to save for retirement. With a good pension pot, you can avoid taking an equity release plan and other mortgage plans in your later life. It might seem like a complicated subject, but all you have to do is to understand the government’s laws on pensions and how the pension tax relief works.
It would help if you also considered getting pension advice from a pension tax advisor for a stress-free process and best counsel. So, stop worrying and procrastinating and start saving today!
And that’s it!
Pension Tax Relief has been extended for another year. This is great news for many small businesses who are going to see an increase in the number of funds they have available. It can be hard to plan ahead when you don’t know what will happen with taxes, so this extension provides some much needed relief until 2020.