Pension Tax Relief in the United Kingdom
Pension tax relief
Most British taxpayers get tax relief on their pension contributions, meaning the Government effectively pays money into your pension pot. Basic rate taxpayers get a 25% tax top up; this means HMRC adds ₤25 for every ₤100 you pay into your pension.
Tax relief on UK pensions
When thinking about how much money you can save into your pension, it is important to understand how pension tax relief works.
For 2021/22 you can get tax relief on pension contributions up to ₤ 40,000 or 100% of your salary (whichever is lower). Any contributions that you make over this limit are taxed at the highest rate of tax you pay.
Basic rate taxpayers get a 25% tax top up, so if you paid ₤100 into your pension, HMRC would effectively add another ₤25 which would bring the total contribution up to ₤125.
Higher and additional rate taxpayers can claim a further 25% and 31% respectively through their Self-Assessment tax returns. You can claim this tax back in three easy steps.
If you earn less than ₤3,600 annually or don’t earn anything, the maximum amount you can contribute to your pension within the tax threshold is ₤2,880, bringing your total annual contribution to ₤3,600 once tax relief is added.
New tapered tax relief allowance
A new tapered allowance has recently been introduced, which affects the pension tax relief limits for high earners. It basically means that if your adjusted income (your income plus pension contributions) is over ₤240,000, your annual pension tax relief limit is reduced, and the amount tapers all the way down to ₤4,000 for incomes of ₤312,000 or more.
This table shows how the tapered allowance works:
| Earnings | New annual allowance |
|---|---|
|
Up to £240,000 |
£40,000 |
|
£250,000 |
£35,000 |
|
£260,000 |
£30,000 |
|
£270,000 |
£25,000 |
|
£280,000 |
£20,000 |
|
£290,000 |
£20,000 |
|
£300,000 |
£10,000 |
|
£310,000 |
£5,000 |
|
£312,000 |
£4,000 |
Example 1
For the 2020/21 tax year, an individual with an adjusted income of £300,000 will exceed the adjusted income limit by £60,000. The individual’s annual allowance would be reduced by half of this – so by £30,000 – leaving them with a tapered annual allowance of £10,000, which is the standard annual allowance of £40,000 less the £30,000 reduction under the tapering rules.
Example 2
For the 2020/21 tax year, another individual earns £330,000. Their income exceeds the adjusted income limit by £90,000. Their annual allowance should be reduced by £45,000, which is the standard annual allowance of £40,000 less the £45,000 reduction under the tapering rules.
However, the minimum that the annual allowance can reduce to under the tapered annual allowance rules is £4,000, so this individual will have a tapered annual allowance of £4,000.
Having said this, you must not forget that you can also carry forward any unused annual allowance from the previous three tax years and use this. Your available annual allowance is your reduced (or tapered) annual allowance plus any unused allowance from the previous three tax years.