Claiming tax relief for personal pensions

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

Back to results

The relief at source method is used for personal contributions made to personal pensions. These FAQs look at how this operates in practice and how any higher or additional rate tax relief can be claimed.

The tax-relievable limit for personal contributions is the higher of: 

  • 100% of the member’s relevant UK earnings or
  • £3,600, per year. 

All contributions paid by a member, a third party on their behalf and by their employer are tested against their annual allowance limit.

If a member’s total contributions exceed their annual allowance limit for the tax year (even after carry forward has been used), they will still be able to claim higher rate and additional rate tax relief on their personal contributions, but an annual allowance charge will apply to the excess contributions.

The allowances and tax rates applicable in the 2016/17 tax year are:

Standard annual allowance £40,000
Personal Allowance £11,000*
Basic rate tax band (20%) Up to and including £32,000
Higher rate tax band (40%) £32,000 to £150,000
Additional rate tax band (45%) Over £150,000

*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 £122,000 or above.

A member’s personal contributions are paid to a personal pension provider net of basic rate 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 a personal contribution of more than this, they can get tax relief on the excess over their relevant UK earnings 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 claim tax relief on any pension contributions they make by relief at source up to the limit of £3,600.

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. 

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 and national insurance have been deducted.

The £400 is paid to Harry’s personal pension plan and basic rate tax relief of £100 is added which means a gross contribution of £500 per month is invested.   

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, the member claims any higher rate and additional rate tax relief 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 limit. The following example shows how this works.

Barry’s gross income is £100,000. His personal allowance is £11,000, which means he has taxable income of £89,000. He makes a net pension contribution of £32,000 to his pension provider and basic rate tax relief of £8,000 is added, resulting in £40,000 being added to his personal pension. 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% £11,000 £0 £11,000 £0
20% £32,000 £6,400 £32,000 £6,400
20% extension N/A £40,000 £8,000
40% £57,000 £22,800 £17,000 £6,800
Total tax £29,200 £21,200

The difference between the total tax figures is £8,000 and this is the higher rate tax relief that Barry can claim back from HMRC. The total tax relief of £16,000 is 40% of the gross contribution of £40,000.

In this example, Barry’s income has to be above £83,000 (£11,000 + £32,000 + £40,000) to allow him to claim full higher rate tax relief on the contribution paid. If, say, his income was £65,000 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 £22,000 (£65,000 - £32,000 - £11,000), which would equate to £4,400. That is, the 20% extension is only given up to the level of his income of £65,000. The total tax relief would be £12,400, made up of £8,000 at basic rate and £4,400 at higher rate.

Additional rate taxpayers may be entitled to further tax relief on personal contributions paid to their personal pension scheme. As the pension scheme provider adds basic rate tax relief at source, the member claims any higher rate and additional rate tax relief 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 both the basic and higher rate tax limits for additional taxpayers. The following example show how this works.

Larry’s gross income is £200,000. His personal allowance is £0, which means he has taxable income of £200,000. He makes a net pension contribution of £32,000 to his pension provider and basic rate tax relief of £8,000 is added, resulting in £40,000 being added to his personal pension.

The following table shows that he can claim the maximum £10,000 additional 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
20% £32,000 £6,400 £32,000 £6,400
20% extension N/A £40,000 £8,000
40% £118,000 £47,200 £78,000 £31,200
40% extension N/A £40,000 £16,000
45% £50,000 £22,500 £10,000 £4,500
Total tax £76,100 £66,100

The difference between the total tax figures is £10,000 and this is the additional rate tax relief that Larry can claim back from HMRC. The total tax relief of £18,000 is 45% of the gross contribution of £40,000.

In this example, Larry’s income has to be above £190,000 (£32,000 + £40,000 + £78,000 + £40,000) to allow him to claim full additional rate tax relief on the contribution paid. If, say, his income was £175,000 and a £40,000 gross contribution was made to his personal pension, then he would not be able to claim additional rate tax relief on the whole of the contribution. He would only be able to claim additional rate tax relief on £25,000 (£175,000 - £78,000 - £40,000 - £32,000), which would equate to £6,250.

That is, the 40% extension is only given up to the level of his income of £175,000. The total tax relief would be £14,250, made up of £8,000 at basic rate and £6,250 at additional rate. 

A third-party contribution is paid by a person other than an 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. 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.

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.

There are two ways for higher rate tax relief to be claimed on a personal contribution to a personal pension:

1. 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.

2. 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.

Additional rate tax relief for personal contributions to a personal pension must be claimed through a self-assessment tax return. This would be done in the same way as described in option 1 of the section ‘How do you claim higher rate tax relief?’. 

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. This could be of use for higher/additional rate taxpayers if they had forgotten to claim higher and/or additional rate tax relief for any personal contributions they had made. 

Pensions Technical Services