Pension tax relief is automatically applied to your salary if your workplace is part of a net pay pension system. However, private and self-invested pensions might also qualify for a further 20% relief. In light of the cost of living crisis, tax-free contributions may be a great way to save money for your future. 

Private pension contributions are tax-free up to a specific limit, and this applies to most pension schemes such as

  • Workplace pensions
  • Personal pensions, and 
  • Overseas pension schemes that qualify for UK tax relief.

Your pension tax relief is the government’s plan to help individuals toward a good retirement. A percentage of your tax is automatically put into your pension. This means that tax relief is paid on your pension at the highest rate of income you pay. 

The research report into pension taxation has found that four in ten taxpayers do not know that their pension contributions automatically receive tax relief. The published research report follows a freedom of information request, which meant the government had to release their finding. 

According to Sage, pension tax relief costs the government an estimated £42.7b in 2020/21. This has always been seen as an area with possible reform, threatening to reduce the tax break for base rate taxpayers. 

In England, tax relief is banded, so basic rate taxpayers can claim up to 20% in pension tax relief, whereas higher rate taxpayers can claim 40%. These rates may differ in Scotland. For example, if you earn £60,000 in the 2022/23 tax year and pay 40% tax on £10,000. You put £15,000 into a private pension. You automatically get tax relief at source on the full £15,000. You can then claim an extra 20% tax relief through your self-assessment tax return. 

Claims depend on the type of pension you’re paying into. For example, a typical employer would pay 3%, and the employee pays 5%, with the option for qualifying older employees to be on a salary sacrifice scheme.  There are two types of ways to claim pension tax relief:

From net pay → Net pay pensions are used mainly through workplace pensions and do not require you to complete any documents to receive tax relief. Net pay pensions are deducted from your salary before income tax is paid, and your workplace pension will automatically claim tax relief. 

At source → Relief at source differ from net pay relief. Therefore you need to check how your pension contributions are processed with your employer. Relief at source also applies to private or self-invested pensions. If you are paying into a pension through your employer, your 80% pension contribution will come from your salary – which is technically called net of basic rate tax relief. Your pension scheme then sends a request to HMRC, which pays an additional 20% into your pension. 

At source relief requires a higher rate and additional rate for taxpayers to complete self-assessment tax refund claims to receive the extra relief that is due to them. 

Resources:

HMRC: Pension tax relief: awareness, understanding and saving behaviours. 

HMRC tax calculator: https://www.gov.uk/check-income-tax 

Pension scheme allowance checking tool: http://www.hmrc.gov.uk/tools/pension-allowance/ 

For any information on payroll, pensions and tax, do not hesitate to contact us.

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