Our Guide to Tax Relief on Pension Contributions

When preparing for your retirement plans, you should know that there are tax-efficient ways to save your pension. If you’re not already aware, now is the time to learn about tax relief pensions, and as the name suggests, a tax-relief pension is one that the government enables you to place your earnings into your pension pot instead of going straight to taxes.

This is a form of reward for responsible citizens that dedicate their time to saving for their future – something we are big advocates of here at Innes Reid!

This means that the highest rate of income tax that you pay will be the tax relief you get from your pension contributions. Here’s another way to look at it:

• Basic-rate taxpayers can claim 20% pension tax relief
• Higher-rate taxpayers can claim 40% pension tax relief:
• Additional-rate taxpayers can claim 45% pension tax relief

How Does Pension Tax Relief Work?

Your pension tax relief will vary depending on what kind of pension scheme you have. Nevertheless, the basics are as follows:

• Net pay arrangement – this type of pension contribution allows you to deduct your tax relief before the tax is calculated on your pay. This means that you can receive tax relief on the spot.

Net pay arrangements cater to traditional occupational pensions, wherein your pension contributions are automatically deducted from your salary by your employer. This generally means that you are not required to do anything to reap the benefits of your tax relief.

• Relief source arrangement – after the tax is calculated, the pension contribution is deducted while the HM Revenue & Customs (HMRC) then sends the value of the tax relief to the pension scheme.

Relief source arrangements focus on personal and stakeholder pensions, which are usually set up with an insurance company.

How Does Tax Relief Work for Non-Taxpayers?

Non-taxpayers are not excluded from pension tax relief, so workers with earnings less than £3,600 a year can still qualify for tax relief. This means that tax relief is added to your contribution, so if you are paying a total of £2,880, you can bump it up to £3,600 into your pension scheme. This also applies to non-taxpayers who have no earnings.

How Much Pension Tax Relief Can You Earn in 2019/20?

There is now an annual pensions allowance established by the government, which serves to put a limit on the amount of pensions contributions for earning tax relief. As of 2019-20, the tax is set at £40,000.

With that in mind, any payments you make over the set limit will be placed under income tax at the highest rate you pay. There is a loophole, however, wherein you can take advantage of your unused allowances from the previous three years so long as you were a member of the pension scheme. If you’re interested in hearing more about this and as to whether you qualify, definitely give us a call to discuss today – 01244 347583

Acquiring pensions that offer a mix of benefits such as tax relief on your contributions is just one way that we can provide a tax-efficient way to boost your retirement pot, however if you’re looking for a financial consultant to help you learn more about tax relief, get in touch with Innes Reid and see how we can help!