One of the main benefits of a pension is the tax relief that you receive. But it is worth noting that there are annual limits on how much tax relief you get on pension payments.
Your pension investments also generally grow free of tax (for example no Capital Gains Tax to pay on investment growth).
This means a pension is a tax-efficient way to save for your future.
Tax relief is available at the rates shown in the table below and is given on a sliding scale, this is known as your marginal rate. In Scotland income tax rates are slightly different to the rest of the UK, therefore rates for pension tax relief are also different and these are shown in the table below.
There are two main ways you can receive tax relief on your pension payments, they are:
This applies to some workplace pensions (known as Occupational Schemes). In a Net Pay scheme your employer deducts your pension payments from your gross salary and you only have to pay tax on what is left. This ensures you receive the right level of tax relief without having to claim anything back from HMRC.
The annual limit for tax relief you can receive in a Net Pay scheme is 100% of your earnings.
Relief at Source
This applies to stakeholder pensions, personal pensions and some workplace pensions, where 20% tax relief is automatically added to your payments. If you pay more than 20% tax, you can claim the additional tax relief through your tax return or direct from the HMRC.
The annual limit for tax relief you can receive in a Relief at Source scheme is the higher of £3,600 and 100% of your earnings. This means you can get tax relief on payments up to £3,600 gross (£2,880 before tax relief is added) even if you have no earnings. A similar treatment applies if you are a Scottish taxpayer, payments receive 20% tax relief even if you only pay tax at 19%.
We understand that tax can be complicated. You can read more on the HMRC website. If you need any more information on pension tax relief, you can call us.
There is an Annual Allowance currently of £60,000 which impacts how much you and anyone paying on your behalf (for example your employer) can pay into your pension without a tax charge. This charge effectively removes the benefit of tax relief. There are circumstances where your annual allowance may be lower than £60,000. These circumstances are:
Money Purchase Annual Allowance (MPAA)
If you withdraw money flexibly from a pension (either via flexible retirement income or take a certain type of lump sum) you will be subject to a reduced annual allowance, which is currently £10,000 (called the Money Purchase Annual Allowance because it only applies to contributions to “defined contribution” pensions).
This means you will incur a tax charge if you and/or your employer pay in more than £10,000 to your pension.
You will have been told by your pension provider if the MPAA applies to you and to notify your other pension providers within 91 days or you could be subject to a fine.
Tapered Annual Allowance
High earners have a lower annual allowance, called the Tapered Annual Allowance. The taper applies if your ‘threshold income’ (your annual income before tax less any personal pension contributions and ignoring any employer contribution) is over £200,000. If your threshold income is above £200,000, then you need to check if your ‘adjusted income’ (your annual income - broadly all income that you are taxed on including dividends, savings interest and rental income - before tax plus the value of your own and any employer pension contributions) is over £260,000.
If it is above £260,000, the annual allowance will reduce by £1 for every £2 that your ‘adjusted income’ exceeds £260,000.
The maximum reduction is £50,000 once adjusted income reaches £360,000. Please speak to your financial adviser for more details.
You can find more information at www.pensionsadvisoryservice.org.uk
The Lifetime Allowance (£1,073,100 for the 2023/24 tax year) applies to the total amount of benefits provided by all of your pension plans. In most cases, 25% of the value of your pension plans can be taken as one or more tax-free lump sums, subject to an overall limit of 25% of the Lifetime Allowance (£268,275 for the 2023/24 tax year).
Certain other lump sums paid from pensions can be paid free of tax up to the Lifetime Allowance, with any excess subject to income tax.
You can find more information at www.pensionsadvisoryservice.org.uk. The tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future. If you think your total pension savings are approaching the Lifetime Allowance you should seek professional advice on the potential tax consequences.