Tax relief on pension contributions
The government is trying to encourage us to save for our retirement by offering us a variety of tax relief on our pensions.
When paying into a pension directly through work, your employer normally takes your pension contributions after National Insurance contributions, but before you pay any tax. Someone paying into a personal pension fund will have paid tax initially but the pension’s provider will claim it back at the basic rate of 20%. So if at the end of the year you’ve contributed £800 into your pension fund the government will top this up to £1000. Anyone who pays tax at a higher rate can claim back the difference through their tax return form at the end of the tax year.
You don’t pay any tax on contributions up to 100% of your earnings up to a limit of £50,000. There are certain restrictions in place to prevent large payments this year to benefit from the larger allowance before it decreases next year.
If you don’t pay any tax you can still benefit from tax relief. On the first £2,880 a year you/somebody else pays into your pension fund the government will top it up by 20%, so to £3,600. This makes paying into a child/grandchild’s pension fund or a non-working partner’s fund worthwhile. Paying into someone else’s pension does not affect your own tax free limits.
25% Tax Free Lump
Another tax benefit of the pension scheme is that it allows you to withdraw up to 25% of your pension fund tax free when you reach the pension age. This total fund has a lifetime tax free allowance of £1.5million, which has been rising each year. Anything above this figure would be subject to taxation.
Another tax benefit is that no tax is paid on any investment income or capital gains made by your pension fund.