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Introduction to Pension Tax Relief

Pension is the amount of money you received from the government after completion of your service tenure. It is given on monthly basis whereas tax relief is the reward given by the govt. as a bonus when you save into pension. Pension Tax relief means you have to pay comparatively less tax on your pension in comparison to other individuals who are paying taxes at normal tax rate. Tax relief is paid on your pension contributions at the highest rate of income tax you pay.

The tax relief rates for different tax payers are given below :

Basic rate taxpayers 20% pension tax relief
Higher rate tax payers 40% pension tax relief
Additional tax payers 45% pension tax relief
Pensions Tax Relief Explained

How Pension Tax Relief Works?

  1. For Basic rate tax payer – Basic rate tax payer gets 20% pension tax relief. For ex- If basic rate tax payer contributes £100 into pension from his or her salary, it will actually cost him £80 due to 20% off as a relief on tax paid on pension amount.
  2. For Higher rate tax payer – High rate tax payer gets 40% pension tax relief. For ex - if higher rate tax payer contributes £100 into pension from his or her salary, it will actually cost him £60 due to 40% off as a relief on tax paid on pension amount.
  3. For Additional rate tax payer – Additional rate tax payer gets 45% pension tax relief. For ex – If an additional rate tax payer contributes £100 into pension from his or her salary, it will actually cost him £55 due to 45% off as a relief on tax paid on pension amount.

Also Read: Pension Plans for the Self-employed and Contractors

Pension Tax Relief Calculator

Pension tax relief calculator is used to calculate how much pension tax relief you are entitled to.

Before calculating the pension tax relief, you must have information about the following -

  1. How much do you earn annually?
  2. Pension contribution
  3. Tax year

After calculating your earnings annually as well as pension contribution, you can easily calculate that you will fall in which category of tax payers – Basic rate tax payers or high rate tax payers or additional rate tax payers.

Also Read: Income Pension Drawdown Calculator Taxes Rules

Claiming Pension Tax Relief

Claiming pension tax relief depends upon the type of pension you are saving, what type of method you are using by which you can get the full tax relief you are entitled to.

There are two ways of claiming pension tax relief –
  1. Pension tax relief from “net pay” – Net pay method is used at some workplaces to claim pension tax relief. In this case, your pension contribution is deducted from your salary before paying income tax and your income scheme automatically claim back the tax relief at highest rate of income tax.
  2. Pension tax relief at source – This applies to all personal pensions as well as some workplace pensions. In case you are having a private pension with an insurance company or self-invested personal person, this is fully applies to you.

    In case you are paying into pension through employer, the employer will take 80% of your pension contributions from your salary which is known as “net of basic rate tax relief”. After paying into your pension, pension scheme send a request to HMRC which results in 20% tax relief into your pension.

    In order to receive extra relief, higher & additional rate tax payers must complete a self-assessment tax return for the relevant tax year.

How Much Pension Tax Relief You Can Earn?

The government imposed a limit on the amount of pension contribution made to claim pension tax relief which is called as pension annual allowance. Pension annual allowance is set at £40,000 for the tax year 2018-19.

Any pension payments made above the limit of £40,000 will be taxed at the highest rate you pay. However, unused allowance of previous 3 years can be carry forwarded if you were a member of pension scheme from a long time.

Pension Tax Relief For Non-Tax Payers & Low Earners

Non-tax payers include persons who are unemployed such a spouse, children etc. Non-tax payers entitled to a relief of 20% even if there are not paying any tax.

If your income does not exceed £40,000 in a year, you can easily save 100% of your income into pension to earn tax relief.

If you are earning £5000 per annum, you can save £5000 into pension and if you are earning £3600 or less, the maximum amount you can contribute is £3600 including government top-up. Therefore, the maximum personal contribution you can pay should not be higher than £2880 a year.

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