Tax Relief on Pension Contributions
A significant advantage of making pension savings (over your standard national insurance contributions) is the Tax relief on Pension Contributions in place to reward those who plan for the future. Pension contributions, whether regular or lump sum payments, are normally eligible for tax relief and are commonly made up of a policyholder’s contributions together with those made by their employer. The relief means that for every £80 paid into the pension, the government pays an additional £20, a 25% bonus.
Higher rate tax payers can claim additional tax relief of up to 20% via their self-assessment tax returns. The exact level of relief depends on the taxpayer’s circumstances. The premium threshold within which a policyholder remains eligible for tax relief is up to one hundred percent of taxable earnings in the UK or £3,600, should that be greater. No tax relief is payable on transfers.
However, tax may be payable on the pension fund if the total contributed by the plan holder and the employer is greater than the annual allowance. The current allowance is £50,000 and tax will be payable in excess of the allowance in any given year. A lifetime allowance limit for all pension arrangements, currently set at £1.5 million for 2012/13, also applies.
Upon retirement, a policyholder usually has the option to receive a tax-free lump sum cash payment. This is drawn from the fund and can be up to 25% of the fund’s value. The remainder is then used to provide a reduced income which is taxed as pension income. Pension income is taxed in the same way as you will have been taxed in employment. If you are drawing a pension and still receiving income from other means you will usually be taxed based on both incomes added together.
The capital growth on the value of the pension investment fund does not attract any capital gains tax. Investment income is also free of UK tax except for dividend income on UK shares. Tax may be payable with respect to any investments held in overseas assets at rates set in those countries.
Future governments may increase or decrease the level of tax relief available. Consequently, it is important to note that different products may have different tax positions which can change over time and which can vary with the policyholder’s individual circumstances.