Everything you need to know about pensions tax relief We provide an extensive run through of the different limits, allowances and rules
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uccessive governments have encouraged saving for later life by offering the financial incentive of not paying income tax on money paid into a pension plan. Pension tax relief boosts pension savings and the final amount available to retire on, thereby increasing the chance of a decent income to live on in later life. Therefore, fewer people are likely to fall back onto state benefits. It’s a valuable incentive and it’s worth understanding how it works in practice. CAN EVERYONE GET PENSION TAX RELIEF? You must be a ‘relevant UK individual’ to qualify for relief. The definition is a bit complicated, but this is generally someone who: • has ‘relevant UK earnings’ (see below for what that means);
• has been resident in the UK at some time during that tax year, or; • was resident in the UK at some time during the previous five years.
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| SHARES | 10 June 2021
You can only receive pensions tax relief on contributions up to the age of 75. Some providers will still accept pension contributions after that age, but some won’t. HOW DO I GET THE PENSION TAX RELIEF? How you get your pension tax relief depends on the type of pension plan you are paying into. If you are paying into an employer’s defined benefit scheme the scheme will operate pension tax relief by the ‘net pay method’. This is also the case for some defined contribution workplace pensions. This is when your employer will take your pension contributions from your salary before it’s paid
to you; after National Insurance has been taken off, but before any income tax is deducted. That way you receive the pension tax relief immediately. Other types of pension schemes – including SIPPs – operate a ‘relief at source method’. Under this method you will pay pension contributions from ‘take-home’ salary – in other words National Insurance and income tax have already been deducted. When you pay into your pension the provider claims the basic rate tax relief at 20% from HMRC, and this is paid directly into your pension plan. To work out your 20% basic rate tax relief calculate 25% of your pension contribution.