How does tax relief on pensions work?Fri Mar 20 09:38:40 GMT 2015
You pay contributions net of basic rate income tax 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.
If you’re a higher-rate or additional-rate taxpayer, you can claim the extra relief from HMRC on your yearly tax return or by asking your tax office to adjust your tax code. The value of any tax relief depends on your individual circumstances. There are maximum amounts that can benefit from tax relief in a tax year: £3,600 or your relevant UK earnings for that tax year, whichever is greater. Any contributions above this won’t benefit from tax relief. Also, there may be a tax charge if your yearly pension savings under all of your registered pension schemes are more than the limit set by the government. This is called the annual allowance.
We may have to return money that we’ve applied to a pension if satisfactory evidence for money laundering and source of wealth checks are not provided. If this occurs, it may be classed as an unauthorised payment in which case we’ll deduct any tax charges (which could be up to 70%) from the money before returning the balance to you.
The lifetime allowance is the maximum amount of tax-advantaged pensions savings you can normally have across of all your registered pension schemes. When benefits are taken, savings above that level may attract a lifetime allowance charge.
Paying into your pension after taking benefits
It’s possible to continue paying into a pension after you take your pension benefits, but the tax limits may change if you do. So you’ll need to plan your actions carefully.
Under the new rules, taking benefits after 5 April 2015 in a number of scenarios, such as certain cash lump sum payments or when you start taking income from a flexi-access drawdown pension, will trigger the money purchase annual allowance tax rules.
This means you’ll have to pay a tax charge on contributions over £10,000 paid during the year to a money purchase pension(s) - for example a personal pension.
Special rules apply in the year that the money purchase annual allowance rules first apply, and different rules apply to final salary pensions. Please speak to your financial adviser for more information.