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Tax Relief on Private Pension Contributions UK Rules

Most personal payments invested into private pensions are tax-free (within set limits). But, similar limits apply to tax relief allowances on your private pension contributions.

TAX ON PENSION CONTRIBUTIONS: Most people can make tax-free contributions into private pensions.

But, there are certain upper limits to be aware of. The thresholds apply to most private pension schemes, including:

  • Personal pensions or stakeholder pensions.
  • Workplace or ‘company pensions‘.
  • Overseas pension schemes. It must be a ‘qualifying overseas pension scheme’ to qualify for UK tax relief.

Note: Tax is liable when you start taking money out of a pension.

Limit on Tax Free Pension Contributions

As a rule, you will need to pay tax if the savings in your pension pots rise above:

  • 100% of your earnings in a year. This would be the upper limit on tax relief that you can get.
  • £40,000 a year. This is the current threshold but the ‘annual allowance‘ can change.
  • £1,073,100 million in your lifetime. This is the current threshold but the ‘lifetime allowance‘ can change.

There are two other reasons why you might pay tax on your private pension contributions. It can happen if your pension provider does not register for tax relief with HMRC.

The same also applies if they do not invest your pension pot complying with the pension rules and regulations of HM Revenue and Customs.

Tax Relief on Personal Pension Contributions

The amount of tax relief you can get on private pension contributions is worth up to 100% of annual earnings. Receiving the tax relief is an automatic process providing:

  • Your employer takes workplace pension contributions out of your salary before they deduct the Income Tax.
  • Your pension provider claims the tax relief for you at a rate of 20% and then adds it to your pension pot. This is also known as ‘relief at source‘. Relief at source occurs in some workplace pensions and all personal and stakeholder pensions.
  • Your rate of Income Tax in Scotland may be 19%. If so, your pension provider claims tax relief for you at the 20% rate. There is no need for you to pay the difference.

Note: You have a responsibility to ensure you do not get too much tax relief on private pension contributions. You must avoid getting reliefs worth more than 100% of your annual earnings. Her Majesty’s Revenue and Customs can ask you to pay back anything over the limit.

Claim Tax Relief on Pension Contributions

There are some situations that allow you to claim tax relief on pension contributions, such as if:

  • Your Income Tax rate is over 20% and the pension provider claims the first 20% for you via the relief at source method.
  • The pension scheme you have is not set up to run automatic tax relief.
  • Another person makes the contributions into your pension pot.

Paying 40% Income Tax

Those who pay Income Tax at the 40% rate should claim tax relief on the extra 20% in their Self Assessment tax return. You should contact HM Revenue and Customs by phone or by a letter if you do not complete tax returns.

Paying 45% Income Tax

Claiming tax relief on the extra 25% must take place by Self Assessment tax return if you pay Income Tax at the 45% rate.

Pension Scheme not set up for Automatic Tax Relief

If your private pension scheme is not set up to get automatic reliefs you will need to claim the tax relief in your Self Assessment tax return.

Note: Those who do not fill in tax returns will need to contact HM Revenue and Customs. Even so, you can only claim tax relief on personal pension contributions if your pension provider has registered with HMRC.

Someone Else Contributes to Your Pension Pot

What if someone else pays money into your pension? Often, it is a spouse or a civil partner. In this case you would still get the automatic get tax relief at 20%. That is providing your pension provider claims it using the ‘relief at source‘ method.

Some workplace pensions allow other people to contribute into the pension pot. If this applies, you may need to make a claim for the tax relief on those particular contributions. If so, call or write a letter to HM Revenue and Customs.

Tax Relief When You Do Not Pay Income Tax

You should still get the automatic tax relief at 20% on the first £2,880 even if you do not pay Income Tax. You get the reliefs on a private pension each tax year (6th of April to 5th of April) if both of these apply:

  • You are exempt from paying Income Tax (e.g. you are getting a low income).
  • Your pension provider uses relief at source to claim tax relief for you at a rate of 20%

Tax Relief and Life Insurance Policies

As a rule, tax relief does not apply to pension contributions used to pay a personal term assurance policy. The exception would be for a protected policy. The definition of a personal term assurance is a life insurance policy that either:

  • Terminates when the first insured person dies.
  • Insures people who all belong to the same family.

Note: As a rule, there will be a tax charge to pay if savings in a pension pot exceed the annual allowance. The current pension annual allowance threshold is £40,000 per year.

Note: As a rule, there is a tax charge to pay if savings in your pension pots exceed the lifetime allowance. The current pension lifetime allowance threshold is £1,073,100 million.

Tax Relief on Private Pension Contributions in United Kingdom