If you want to know about your entitlement to pensions tax relief we strongly suggest you speak to a tax adviser or financial adviser.

The Government encourages retirement saving by offering tax relief on the contributions you pay. How you receive tax relief depends on what type of pension you’ve got, and we’ve provided more information about the different methods of receiving tax relief below.

To be eligible for tax relief you must be a ‘relevant UK individual’ (for this purpose, UK means England, Scotland, Wales and Northern Ireland). This is someone who in a tax year:

  • Has relevant UK earnings chargeable to UK income tax for that tax year.
  • Was tax resident in the UK at some time during that tax year.
  • Was tax resident in the UK at some time during the five tax years immediately before that tax year and when they became a member of the pension scheme.
  • Has, or their spouse / civil partner has, for that tax year, general earnings from overseas Crown employment subject to UK tax.

Tax relief on contributions

You are entitled to tax relief on any pension contributions up to 100% of your earnings. There are three different ways to get tax relief, depending on the type of pension you have:

  • ‘Relief at source’ – this is when your pension provider automatically collects basic rate tax relief from HMRC and adds it to your pension pot. Assuming your basic rate of tax is 20%, this means £100 is paid into your pension pot for every £80 you contribute.  You may be able to claim further tax relief from HMRC if you pay income tax at a rate above your basic rate. You can visit gov.uk or speak to a tax adviser for more information about the tax you pay.  If you have no earnings you can still get tax relief on gross contributions up to £3,600 (this also applies if you earn less than £3,600), but only if you pay into a pension that gets tax relief at source.
  • ‘Net pay’ – this is generally where you are a member of an occupational pension scheme and your pension contributions are deducted from your earnings before income tax is calculated, so you receive tax relief at the highest marginal rate that you pay, or
  • You make gross contributions to your pension and claim all your tax relief directly from HMRC.  This method usually applies to retirement annuity contracts.
  • Your employer will normally claim their own tax relief on any contribution they pay into your pension.

Annual Allowance

The Annual Allowance (AA) is the maximum amount of pension savings you can make each tax year without having to pay a tax charge, known as the Annual Allowance Charge.

For money purchase pensions, also known as defined contribution pensions (which are invested to build up a pot of money), pension savings are the contributions paid in by you and your employer.

For defined benefit pensions, including final and average salary schemes (which promise a pension income based on your salary), it’s measured in terms of increases to the amount of pension. It’s possible for defined benefit pensions to increase even if contributions are not currently being paid.

The AA limit that applies to you depends on whether:

  • you have money purchase pensions, or defined benefit pensions, or both.
  • you’ve made a flexible pension withdrawal from a money purchase pension using the pensions flexibility rules introduced on 6 April 2015.

It’s your responsibility to know which limit applies to you, and to make sure you stay within it, if you don’t want to pay a tax charge.

The table below explains the different limits, and when they apply:

Type of pension Has there been a flexible pension withdrawal? AA limit
(in tax year 2018/2019)
Someone who only has money purchase pensions No £40,000
Yes £4,000
Someone who only has defined benefit pensions N/A £40,000
Someone with both money purchase and defined benefit pensions No £40,000
Yes
  • £4,000 applies to money purchase pensions
  • If the £4,000 limit is not exceeded by money purchase pensions, the balance of £40,000 applies to defined benefit pensions.
  • If the £4,000 limit is exceeded by money purchase pensions, an AA of £36,000 applies to defined benefit pensions.

You can carry forward unused AA from up to three previous tax years. However, if you’ve made a flexible pension withdrawal you’ll only be able to carry forward unused AA for your defined benefit pensions (if you have any). For further information on pension tax relief and the AA visit gov.uk or speak to a tax adviser.

 

Tapered annual allowance (AA)

In certain circumstances your Annual Allowance may be reduced, as explained below. This is known as the Tapered Annual Allowance and will happen if your threshold income exceeds £110,000 and your adjusted income exceeds £150,000, in a tax year. If this applies to you, your AA will reduce by £1 for every £2 of adjusted income over £150,000, subject to a maximum reduction of £30,000. The maximum reduction means anyone with an adjusted income of £210,000 or more will have an AA of £4,000, rather than £40,000.

If someone is subject to the £4,000 money purchase AA and earns more than £150,000 in a tax year, the balance of that year’s AA for any defined benefit savings will be restricted. This means for those with an income of £210,000 or more, the remaining AA for defined benefit pensions will be zero (£4,000 tapered AA, minus £4,000 Money Purchase AA), although any defined benefit carry forward can still be used.

Definition of Threshold Income

Threshold income is the sum of A + B – C – D.

A, B, C and D are defined below.

A is Net income. Net income is total taxable income for the tax year, after any tax relief is deducted.  Total income is income from all sources such as employment income and benefits in kind, earnings from self-employment or partnership, most savings interest, most pension income, dividends from shares and rental income from property.

From this total any tax reliefs are deducted (see section 24 of the Income Taxes Act 2007 for what’s allowed). This includes: qualifying loan interest payments; business losses in early years of trade; gifts of shares and securities made to charities, and qualifying contributions to registered pension schemes for which tax relief cannot be given directly from employment earnings. This means, for example, contributions to retirement annuities where the provider doesn’t give tax relief at source as well as contributions to occupational pension schemes in excess of earnings.

B is the amount of any employment income exchanged for pension contributions using relevant salary sacrifice or flexible remuneration arrangements set up on or after 9 July 2015.

C is the gross amount (before tax relief) of any contributions paid to pensions that have tax relief deducted at source from net income.  This includes personal pensions set up after 30 June 1988 as well as free-standing additional voluntary contribution schemes.

D is the amount of any taxable lump sum received in the tax year from a registered pension scheme as the result of the scheme member dying after age 75.

Adjusted Income is A + E + F + G – D

A and D are as defined above for threshold income

E is the amount of any qualifying contributions you made to registered pension schemes for which tax relief cannot be given directly from employment earnings. This means, for example, contributions to retirement annuities where the pension provider doesn’t give tax relief at source, as well as contributions to occupational pension schemes in excess of earnings. This amount will have been deducted in the calculation of A above but is added back here.

F is the gross amount of any pension contributions you made which were deducted from employment income before tax, under a net pay arrangement (this method of tax relief is primarily used for occupational pension schemes). This also includes contributions to overseas pension schemes for those who are non-domiciled for UK tax purposes. Both of these will have been deducted in the calculation of A but are added back here.

G is the total amount of employer contributions paid into any registered pension schemes.

As the definitions of both types of income are quite detailed, we strongly suggest you speak to a tax adviser or financial adviser if you think you may be affected by the introduction of tapered annual allowance.

Alignment of Pension Input Periods

Annual Allowances are measured across a pension input period (PIP).  Depending on how your pension was set up, your PIP may not have originally matched the tax year. To ensure the Tapered Annual Allowance works as intended, the government decided to align all PIPs with the tax year from 6 April 2016. They also introduced special Annual Allowance and PIP rules for the 2015/16 tax year only.

The overall Annual Allowance for 2015/16 was £80,000, plus any carry forward from the previous three tax years. The overall money purchase annual allowance was £20,000. HMRC ended all open PIPs on 8 July 2015 and everyone started a new one from 9 July 2015 to 5 April 2016. HMRC also split the 2015/16 tax year into two ‘mini tax years’ for annual allowance purposes only. The first ran from 6 April 2015 to 8 July 2015 and the second ran from 9 July 2015 to 5 April 2016.

The annual allowances  and PIP rules for this year are complicated. If you require detailed information you can refer to HMRC’s online Pensions Tax Manual or speak to your financial or tax adviser.

For further information about the tapered AA and the annual allowance for 2018/19, visit www.gov.uk