How do I get tax relief on pension contributions?

Background to pensions and tax
Pensions are a tax-efficient way of saving for your future retirement. This is because you receive tax relief on the contributions you make to your pension. You get a top-up from the government equal to basic rate tax relief on anything you pay into a pension. If you pay tax at higher or additional rates, you’ll also be entitled to further tax relief on your tax return.  
There are many different types of pension, including:
  • Workplace pension schemes
  • Personal/private pensions
  • Stakeholder pensions
  • Self-invested Personal Pensions (SIPPs) – that allow individuals to make their own decisions about how contributions are invested.
You can save into more than one pension scheme at a time. 

See the related article at the bottom on how to enter this in untied (and if you're looking for details about pension income).

Why would I need a pension?

Most people don’t want to work forever - so they’ll need some form of income for their retirement. Although you’ll probably get a regular state pension when you’re older, you might like to enjoy more than this basic level of income. Also, your state pension might not be paid until you’re aged 67 or older. You can check your state pension age here. One way of securing a retirement income is through an additional pension so that you have some extra money available when you stop working.

How do I get tax relief on pension contributions?

If your employer deducts pension contributions directly from your salary, then you may be receiving tax relief automatically under a 'net pay arrangement'. This means that the pension contribution is deducted before tax is calculated on your pay, so you receive tax relief there and then. Whatever is left is treated as your taxable salary. If you pay pension contributions directly from your salary under a 'net pay arrangement', then you don’t need to do anything else about claiming tax relief. 
You can also sometimes make a salary sacrifice into a pension scheme. Some people do this if they’re receiving a bonus that takes them over the £100,000 threshold, where they effectively start paying tax at 60% or more. You should speak to your employer if this is something you want to explore.
For most other pensions, you’ll make your contribution net of basic rate tax, and the pension provider will give you 'relief at source' by adding an amount equal to 20% to your contribution (which they claim back from the government). So, if you pay £80 into your pension, the government adds an extra £20, making a total amount of £100 that goes into your pension pot. This gross amount is the amount you can then claim additional tax relief on via your tax return at your highest tax rate. The same thing happens if you have a SIPP (Self-invested Personal Pension). A SIPP allows you to control the decisions about how your pension pot is invested.  As with other ‘relief at source’ pensions, your gross contributions can be taken off your total income figure when determining if you go over the £100,000 threshold, where you could be paying tax and national insurance at a combined marginal rate of 62% or more!
You can read our blog about the 60%+ marginal rate applying to people earning over £100,000 and see how pension contributions can help you lower this rate.

Are there any limits on what I can claim tax relief on?

You can get tax relief on up to 100% of your annual earnings, up to an annual allowance limit of £40,000. This limit is reduced if your income exceeds £240,000 in the 2020/21 tax year. 
Even if you don’t have any income or earnings, you can still get tax relief on pension contributions up to £2,880 each year.

There’s also a limit on the amount of pension benefit that can be drawn from your pension schemes without triggering a tax charge. This is called the lifetime allowance. Most people aren’t affected by the lifetime allowance as this is currently over £1million. If you think the value of pay-outs from all your pension schemes might exceed this limit, we’d recommend you seek specialist advice.

When can I access my private pension?

You can currently access most private pensions from age 55, but this will be rising to 57 from 2028. However, you can retire earlier due to ill health. 
If your pension scheme rules allow, you’ll be able to take 25% of your pension fund as a tax-free lump sum after the age of 55 (or later from 2028). The balance of the pension fund is taxed at your relevant tax rate in the year you receive it. There are a range of ways you can access this.

Take advice

We hope you find this information useful. Please note that we don’t provide financial advice. Pensions can be complex, so we’d recommend you take professional advice before planning any new pension arrangements. 
A final word of warning – beware of pension scammers! There are some unscrupulous people out there who want to get their hands on your pension pot. Be wary of anyone who contacts you out of the blue, offering anything that sounds too good to be true!
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