Tax relief on pension contributions

Tax relief on pension contributions is a government incentive designed to encourage individuals to save for retirement. It means that when an individual contributes money to their pension, they receive tax relief on the amount they contribute. The amount of tax relief available depends on the individual’s marginal tax rate.

The current tax relief system in England works as follows:

  • Basic rate taxpayers (those who earn up to £50,270 in the tax year 2022/23) receive tax relief at the basic rate of 20% on their pension contributions. This means that for every £80 contributed to their pension, the government adds £20 in tax relief, making a total contribution of £100.
  •  Higher-rate taxpayers (those who earn between £50,271 and £150,000 in the tax year 2022/23) receive tax relief at the higher rate of 40% on their pension contributions. This means that for every £60 contributed to their pension, the government adds £40 in tax relief, making a total contribution of £100.
  • Additional rate taxpayers (those who earn over £150,000 in the tax year 2022/23) receive tax relief at the additional rate of 45% on their pension contributions. This means that for every £55 contributed to their pension, the government adds £45 in tax relief, making a total contribution of £100.

There are two main ways to claim pension tax relief, through Pension Tax Relief at Source or Pension Tax Relief from ‘Net Pay.’

Pension Tax Relief at Source

If you are a member of a pension scheme that uses ‘Relief at Source,’ your pension provider claims basic rate tax relief (currently 20%) on your behalf and adds it to your pension pot. This means that for every £80 you contribute, your pension provider will add an extra £20 to your pension pot. If you are a higher or additional rate taxpayer, you can claim additional relief through your self-assessment tax return.

Pension Tax Relief from ‘Net Pay’

If you are a member of a pension scheme that uses ‘Net Pay’, your pension contributions are deducted from your salary before income tax is calculated. This means you receive tax relief automatically at your highest rate of income tax. For example, if you are a higher rate taxpayer (currently 40%), your pension contributions will be deducted from your salary before income tax is calculated at 40%.

There are annual and lifetime allowances for pension contributions that limit the amount of tax relief an individual can receive. The annual allowance is currently set at £40,000 for most individuals, and the lifetime allowance is currently set at £1,073,100 for the tax year 2022/23.

Non-taxpayers and low earners can still receive pension tax relief on their contributions. Here’s how it works:

Non-taxpayers

If you have no taxable income, you can still contribute up to £2,880 per tax year to a personal pension and receive tax relief at the basic rate of 20%. This means the total amount paid into your pension scheme will be £3,600 (including the tax relief). You will need to apply to your pension provider to claim the tax relief.

Low earners:

 If you are a low earner (earning less than £12,570 per year for the tax year 2022/23), you can still receive tax relief on your pension contributions. Your pension provider will automatically claim tax relief at the basic rate of 20% on your contributions, up to a maximum of £3,600 per tax year. If you are a higher or additional rate taxpayer, you can claim the additional tax relief through your self-assessment tax return.