This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
The relief at source method of tax relief is normally used for personal contributions made to personal pensions. This section of the guide looks at how this operates in practice and how any higher or additional rate tax relief can be claimed.
Income tax rates and bands are different in Scotland to the ‘rest of the UK’. All examples included in this guide are based on the ‘rest of the UK’ rates and bands.
Since 6th April 2019, the Welsh government has had the power to set income tax rates but has opted to keep these the same as England and Northern Ireland for the time being.
The tax-relievable limit for personal contributions in a tax year is the higher of:
- 100% of the member’s relevant UK earnings and
- £3,600.
All money purchase contributions paid by a member, a third party on their behalf and by their employer are tested against the member’s annual allowance. The value of any defined benefit pension accrued during the tax year is also tested. The standard annual allowance is currently £60,000.
If the total exceeds their annual allowance for the tax year (taking into account any unused annual allowance carried forward), they will still be able to claim higher rate and additional rate tax relief on their pension contributions, but an annual allowance charge will apply to the excess above their available annual allowance.
The allowances and tax rates applicable in the 2023/24 tax year for the UK are:
Standard Personal Allowance |
£12,570* |
|---|---|
Basic rate tax band (20%) |
£12,571 to £50,270 |
Higher rate tax band (40%) |
£50,271 to £125,140 |
Additional rate tax band (45%) |
Over £125,140 |
In Scotland for tax year 2023/24, the tax rates and bands are:
Standard Personal Allowance |
£12,570* |
|---|---|
Starter rate tax band (19%) |
£12,571 to £14,732 |
Basic rate tax band (20%) |
£14,733 to £25,688 |
Intermediate rate tax band (21%) |
£25,689 to £43,662 |
Higher rate tax band (42%) |
£43,663 to £125,140 |
Top rate tax band (47%) |
Over £125,140 |
A member’s personal contributions are paid to the personal pension provider net of basic rate tax (i.e. contributions are paid from net salary after the deduction of tax). This is the case whether the member pays the contributions directly to the provider, or the employer deducts the net contribution from the member’s pay (after the deduction of income tax) and passes it on.
If a member has relevant UK earnings of less than £3,600 but is making personal contributions that exceed their earnings, they can get tax relief up to the limit of £3,600. Relief at source is the only method that allows members to get this extra tax relief on contributions that exceed their relevant UK earnings (up to £3,600).
Even if an individual has no earnings, they will still be able to get tax relief on any personal contributions to personal pensions up to the limit of £3,600 gross (£2,880 net).
The personal pension provider will add basic rate tax relief to the net contribution so that the total gross amount is invested for the member. The pension scheme provider will recover the basic rate tax relief from HMRC.
Example
Harry pays a personal monthly net contribution of £400 to his employer’s group personal pension scheme. His employer deducts the net amount from Harry’s pay after tax has been deducted.
The £400 is paid to Harry’s personal pension plan and basic rate tax relief of £100 (20%) is added which means a gross contribution of £500 per month is invested into his pension.
His total gross annual contribution is £6,000 (£4,800 net).
Higher rate taxpayers may be entitled to further tax relief on personal contributions paid to their personal pension scheme. As the pension scheme provider gives basic rate tax relief at source, members must claim any higher rate and/or additional rate tax relief directly from HMRC. The extra tax relief available depends on the total personal contributions paid and the member’s total income.
The extra tax relief due is given by extending the basic rate tax band. The following example shows how this works.
Stephan’s gross income is £100,000. His personal allowance is £12,570, which means he has taxable income of £87,430. He makes a net pension contribution of £32,000 to his pension and basic rate tax relief of £8,000 is added, resulting in a total contribution of £40,000. The following table shows that he can claim a further £8,000 higher rate tax relief:
|
Tax payable assuming no pension contribution |
Tax payable assuming £40,000 gross pension contribution |
||
|---|---|---|---|---|
Tax rate |
Tax band |
Tax |
Tax band |
Tax |
0% |
£12,570 |
£0 |
£12,570 |
£0 |
20% |
£37,700 |
£7,540 |
£37,700 |
£7,540 |
20% extension |
N/A |
£40,000 |
£8,000 |
|
40% |
£49,730 |
£19,892 |
£9,730 |
£3,892 |
Total tax |
|
£27,432 |
|
£19,432 |
The difference between the total tax figures is £8,000 and this is the higher rate tax relief that Stephan can claim back from HMRC. The total tax relief of £16,000 is 40% of the gross contribution of £40,000.
Higher rate tax relief is only available to the extent that higher rate tax is due to be paid. In the above example, Barry’s income has to be above £90,270 (£12,570 + £37,700 + £40,000) to allow him to claim full higher rate tax relief on the contribution paid. If, for example, his income was £66,620 and a £40,000 gross contribution was made to his personal pension, then he would not be able to claim higher rate tax relief on the whole of the contribution. He would only be able to claim higher rate tax relief on £16,350 (£66,620 - £37,700 - £12,570), which would equate to £3,270. That is, the 20% extension is only given up to the level of his income of £66,620. The total tax relief would be £11,270, made up of £8,000 at basic rate and £3,270 at higher rate.
Additional rate taxpayers may be entitled to further tax relief on personal contributions in a similar way to higher rate taxpayers.
The extra tax relief due is given by extending both the basic and higher rate tax bands for additional taxpayers. The following example show how this works.
Amelia’s gross income is £200,000. Her personal allowance is £0, which means she has taxable income of £200,000. She makes a net pension contribution of £8,000 to her pension and basic rate tax relief of £2,000 is added, resulting in a total contribution of £10,000.
The following table shows that she can claim the maximum additional rate tax relief:
|
Tax payable assuming no pension contribution |
Tax payable assuming £10,000 gross pension contribution |
||
|---|---|---|---|---|
Tax rate |
Tax band |
Tax |
Tax band |
Tax |
20% |
£37,700 |
£7,540 |
£37,700 |
£7,540 |
20% extension |
N/A |
£10,000 |
£2,000 |
|
40% |
£87,440 |
£34,976 |
£77,440 |
£30,976 |
40% extension |
N/A |
£10,000 |
£4,000 |
|
45% |
£74,860 |
£33,687 |
£64,860 |
£29,187 |
Total tax |
|
£76,203 |
|
£73,703 |
The difference between the total tax figures is £2,500 and this is the additional rate tax relief that Amelia can claim back from HMRC. The total tax relief of £4,500 is 45% of the gross contribution of £10,000.
Additional rate tax relief is only available to the extent that additional rate tax is due to be paid. In the above example, Amelia’s income has to be above £135,140 (£37,700 + £10,000 + £77,440 + £10,000) to allow her to claim full additional rate tax relief on the contribution paid. If, say, her income was £135,140 and a £30,000 gross contribution was made to her personal pension, then she would not be able to claim additional rate tax relief on the whole of the contribution. She would only be able to claim additional rate tax relief on £10,000 (£135,140 - £125,140).
That is, the 40% extension is only given up to the level of her income of £135,140. The total tax relief would be £12,500, made up of £6,000 at basic rate given at source, and £6,500 claimed back from HMRC.
It is worth noting that the tapered annual allowance may apply to those with adjusted income of more than £240,000. This will not affect the claiming of tax relief - a separate annual allowance charge will apply if the tapered annual allowance does apply to the member. See the Tapered Annual Allowance section of our Annual Allowance guide for further information.
A third-party contribution is a contribution paid by a person other than the member or their employer. A person is defined in HMRC guidance as an individual, a corporate body or other legal entity. The contribution is treated as if the member had paid it - so the third party pays the contribution net of basic rate tax but it’s the member who can claim any higher rate and additional rate tax relief on the gross contribution based on their own personal circumstances. Even if the third party is a higher rate or additional rate taxpayer, they are not entitled to claim any tax relief on a contribution they pay into someone else’s pension scheme.
Example
Jane pays a net annual contribution of £2,000 to her personal pension plan and her husband pays a further net annual contribution of £2,000 into her plan.
Basic rate tax relief of £1,000 is added so a total gross contribution of £5,000 is invested in Jane’s plan. As Jane is a higher rate taxpayer with earnings of £100,000, she can claim an additional 20% relief on the total gross amount of £5,000. So the extra tax relief that Jane can claim is £1,000.
Higher and additional rate tax relief can be claimed though an individual’s annual self-assessment tax return. Alternatively, higher rate relief can be claimed by notifying the local tax office. Both methods are described below:
Through the annual self-assessment tax return
Higher rate tax relief can be claimed by entering the amount of gross personal contributions made to a personal pension scheme in the relevant part of the annual self-assessment form (including any contributions made by a third party). Employer contributions should not be included in this amount. Tax relief is given in one of three ways:
- a change to the tax code.
- a tax rebate.
- a reduction in tax already due to HMRC.
By notifying the local tax office
People who don’t usually fill in an annual self-assessment form, or who don’t want to wait for their higher rate tax relief, can phone or write to their local tax office with details of:
- the personal pension scheme that personal contributions are being paid to,
- the date that the contributions start, and
- the gross amount of the personal contributions paid.
The local tax office will then arrange for their tax code to be changed so that higher rate relief is available throughout the year in which the contributions are being made. Any changes to the information given can be notified either by letter or through a self-assessment tax return at the end of the tax year.
There is a time limit of four years to claim back any tax relief from HMRC. A claim must be made within four years of the end of the tax year that a member is claiming for.
HMRC guidance for tax relief on personal contributions can be found here:
*If an individual has a lower personal allowance than the standard amount, this will affect the basic and higher bands for 'rest of the UK' taxpayers and the starter, basic, intermediate and higher bands for Scottish taxpayers. The personal allowance is reduced by £1 for every £2 of income above a £100,000 income threshold, so in effect there's no personal allowance for those earning £125,140 or more.