In 1988, the government introduced personal pensions and tax relief that goes hand in hand, as a way to encourage saving for the long-term. Over the years, many changes have taken place in the retirement savings universe, and with each new budget, we expect even more tinkering! Despite the ongoing changes, it’s important to understand how tax relief works and who it benefits.

If you’re setting money aside in personal pensions and aren’t sure if you’re eligible for tax relief, you’ve come to the right place!

Who is Eligible?

When you’re saving a portion of your income instead of using it now, the government gives you an incentive in the form of tax relief. All taxpayers who contribute to a personal pension, including non tax payers, basic rate, higher rate, and additional rate payers are all eligible for tax relief at some level, so long as they are under age 75.

Even contributing to another person’s pension, like a spouse or grandchild, attracts tax relief – for the pension holder though, not the contributor.

While tax relief is essentially available to everyone, it isn’t something you receive if pension contributions are made through salary sacrifice. Similarly, any employer contributions made to pensions do not come with tax relief. But don’t let these nuances discourage you! There’s plenty of tax relief ready for the taking.

How Much is Available?

When tax relief is applied to pension contributions, it means that the money you would have paid in tax goes into your pension pot instead of to the government. Here’s what that look likes based on your rate of income tax:

  • – Non and Basic-rate taxpayers get 20% tax relief
  • – Higher-rate taxpayers get 40% tax relief
  • – Additional-rate taxpayers get 45% tax relief

So, a basic-rate taxpayer who contributes £800 to her pension gets an added £200 from the government, making the full pension contribution £1,000. For a higher-rate taxpayer, only £600 is needed to get a £1,000 contribution, and additional-rate taxpayers only contribute £550 to get the same £1,000.  Higher and additional rate taxpayers receive 20% tax relief into their pension, and get the higher or additional rate tax relief back through self assessment – you can call HMRC to arrange this.

Tax relief is available in two main forms: through net pay arrangements and tax relief at source.

The good news is that higher- and additional-rate taxpayers who did not claim tax relief for pension contributions can go back in time to do so. This provision is only available for the previous three years, and you must have made pension contributions during that time to claim the tax relief.

Are There Limits?

Of course with any benefit, there come limits and restrictions. For non-taxpayers, the maximum that can be contributed to a pension is the lower of £3,600 or total income. This amount includes the tax relief, so really the personal contribution is limited to £2,880.

The government also imposes an annual allowance for taxpayers as it relates to tax relief, set for the 2017/18 tax year at £40,000 or gross earnings, whichever is lower. This means that any pension payments you make over that limit are subject to the income tax rate you would otherwise pay.

If you’ve started taking money from your pension pot but are still contributing, the money purchase annual allowance may impact your tax relief maximum. Read more about recent changes to the MPAA in a recent article we published.

You always have to be aware of the lifetime allowance, currently at £1 million. While this restriction does not have an immediate impact on your tax relief amount, it does limit how much you can contribute to your pension pot over your lifetime.

Pension savings are a smart way to set aside for retirement goals, and the tax relief currently available makes for an even sweeter deal. If you want to know more about the benefits of tax relief or how you’re tracking toward your retirement dreams, get in touch with us today.

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