In 2017-2018, the projected gross pension1 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 economics’ 2being 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.
With that said, 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 HMRC3(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.
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 further 25% and 31% respectively via the Self-Assessment Tax Returns4form 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.
The Current Tapered Tax Relief Allowance
Recently, the government introduced a new tapered allowance5 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|
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).
Currently, you can claim tax relief on your pension contributions of up to €50,000 per annum and €1.5 million over your lifetime.
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.
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!