How does tax relief on pensions work?19 March 2018
You pay contributions net of basic rate income tax to a relief at source scheme and we collect the tax relief from HMRC. Basic rate tax relief is currently 20%. So, if you contribute £80 a month, £100 will be invested automatically in your plan – that’s an additional £20 at no extra cost to you.
There’s a limit on the amount of personal and third party contributions that can be made in a tax year that can benefit from tax relief: this is the greater of £3,600 or 100% of your relevant UK earnings and excludes any contributions made by your employer.
There are also certain limits to how much you can contribute to your pension that can benefit from tax relief:
- If total contributions made by you, your employer or a third party, exceed the current annual allowance (the total amount that can be paid into your pension(s) each tax year), there may be tax to pay on the excess
- If your pension savings are greater than the lifetime allowance when you come to take your benefits, you may have to pay tax on the excess.
This is a brief summary only, and there are circumstance where limits may be greater or smaller than the standard allowances - for example if you’re a high earner you may be subject to a tapered annual allowance. Or if you flexibly access your pension benefits, you’ll be subject to the money purchase annual allowance on some of your pension. For more information visit www.hmrc.gov.uk/tax-on-your-private-pension or speak to a financial adviser.
This information is based on our understanding of current, taxation law and HMRC practice, which may change.