In an effort to encourage you to put something aside for your retirement, the Government provide varying levels of tax relief on private pension contributions, whether you’re placing money into a personal or workplace pension (or both).
This tax relief on private pension contributions can be used to reduce the amount of tax you pay, or increase the size of your pension fund, with you being able to claim relief worth up to 100 percent of your annual take-home earnings (including your salary, dividends, and all investment income).
Keep in mind, in order to be able to claim tax relief your personal (or workplace; whether your own, or your employer’s) pension provider must be registered with HM Revenue and Customs (HMRC).
Because you’ve already paid tax on any income you pay into a personal pension you’ll automatically get tax relief on these contributions, with your pension provider claiming back your income tax at the basic 20 percent rate to place into your pension pot (known as the ‘relief at source’ method).
If you pay tax at the higher, 40 percent rate, the Government allow you to claim back the extra 20 percent tax you paid on your pension contributions via your Self Assessment tax return to ensure you’re not missing out. If you don’t currently complete a Self Assessment tax return you may contact HMRC directly to reclaim the extra tax payments.
If you’re self-employed with a number of employees of your own, there’s a good chance that you already have a workplace pension set up for them, and yourself.
If you’re employed by someone else, however, you may find that your employer has been making contributions into your workplace pension all along; with them deriving these contributions from your pay directly before they deducted your income tax. Known as a net pay arrangement, you won’t pay tax on these workplace pension contributions but you will be liable to pay National Insurance Contributions (NICs) on them.
Limits to Tax Relief on Pension Contributions
There is, of course, a limit to the amount of tax relief you can receive on your private pension contributions in a given year; though this limit is, arguably, very reasonable.
You can receive tax relief on contributions up to 100 percent of your annual take-home earnings (up to the age of seventy-five), with you being able to place these contributions into a number of different pension schemes, not just one. The Government, on their website, make it clear that it’s your (or your accountant’s) responsibility to ensure you don’t receive tax relief worth more than 100 percent of your earnings in a given year.
The actual amount you can save into private pension schemes each year has a top quota, with this being £40,000 for the 2015-16 tax year.
Experienced Tax Accountants
To speak with a professional tax accountant to discuss receiving tax relief on pension contributions, whether in your personal or workplace pension, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.