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 2023/2024) |
|---|---|---|
| Someone who only has money purchase pensions | No | £60,000 |
| Yes | £10,000 | |
| Someone who only has defined benefit pensions | N/A | £60,000 |
| Someone with both money purchase and defined benefit pensions | No | £60,000 |
| Yes |
|
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
The tapered annual allowance only affects people with large taxable incomes.
If you meet the following conditions in any tax year:
- your Threshold Income is more than £200,000 and
- your Adjusted Income is more than £260,000
your Annual Allowance will reduce by £1 for every £2 of Adjusted Income over £260,000 subject to a maximum reduction of £50,000. This means the most a tapered annual allowance can be reduced to is £10,000.
The tapered annual allowance rules are complicated. If you believe you may be affected, MoneyHelper has more information and examples, or you can speak to your financial adviser.
