How to claim pension tax relief

Did you know the government helps boost your pension contributions through tax relief? I’m Charlene Young, Senior Pensions and Savings expert at AJ Bell. In this short video I will explain what pension tax relief is, and help you make sure you’re not missing out on what you’re entitled to.

How tax relief works depends on who is paying into your pension. Let’s start with money you pay in – known as personal contributions.

Pension tax relief is the government’s way of rewarding you for saving for retirement and it can make a big difference to the value of your pensions savings. You’ll get it on your personal contributions if you’re a UK resident and you’re under the age of 75.

When you pay into a SIPP (short for Self-invested personal pension) or Ready-made pension, we’ll reclaim basic rate – or 20% - tax relief automatically from HMRC. This is paid directly into your pension when we receive it – depending on the date you made your contribution, this could take around 7 to 11 weeks.

For every £800 you pay into your pension, HMRC adds £200 — meaning your contribution becomes £1,000. The amount of tax relief you can claim is limited by your UK earnings - you cannot usually pay more into your pension than you earn each year. Earnings include your salary and bonuses, or your profits if you are self-employed. Dividends or property rental income do not qualify as earnings for the purposes of pension tax relief.

Paying 100% of your earnings into your pension is an extreme example, but if you earn £50,000 a year before tax, you could pay £40,000 into a pension, such as a SIPP, after tax and this would be topped up by tax relief to £50,000 – your earnings figure before tax.

If you pay more than 20% income tax on your earnings – perhaps because you are a Scottish taxpayer, or you pay higher-rate tax (40%) or additional-rate tax (45%) in the rest of the UK, you’re entitled to even more tax relief.

But you’ll need to claim it yourself – this extra relief is not paid into your pension automatically.

If you already complete a Self-Assessment tax return, you’ll need to include your pension contributions on your return to make sure you claim the additional 20% or 25% tax relief. This figure will include the automatic basic rate relief we have claimed for you.

If you don’t usually have to complete a tax return, you can claim the extra relief directly online from HMRC. You’ll need your pension details and national insurance number to hand. You can also write to HMRC, although this will take longer.

This means that if you pay income tax on your earnings at 40%, getting the £1,000 into your pension in our example earlier could cost you as little as £600.

To do this, you’d pay in £800, and HMRC will top this up to £1,000. Then as a 40% taxpayer, you can claim an extra £200 tax relief from HMRC. This lowers the cost of the contributions to £600.

You’ll either get that extra relief through your tax code adjustment, a tax refund, or an adjustment to your tax bill for the year. Even if you don’t have an income, you can still get some tax relief on pension contributions. You can pay in up to £2,880 a year, and HMRC will top that up to £3,600.

Your employer can also get tax relief on money they pay into your pension. They can claim the cost of pension contributions for their employees as a business expense, which reduces their taxable profits. The employer tax relief is not paid into your pension, but it offers an incentive for companies to make extra employer contributions – which you’ll benefit from.

Unlike personal contributions, employer contributions are not generally restricted by your earnings.

We’ve talked about the earnings limit for tax relief. But you also need to consider the annual allowance on what you can pay into your pension. For most people, it’s £60,000 a year and this covers everything paid into a pension, by you personally or on your behalf, such as employer contributions and the automatic government tax relief top up too.

Your annual allowance could be lower if you have a very high income, or if you’ve already started to access your pension. You’ll face a tax charge if you go over your annual allowance for the tax year – so it’s worth keeping it in mind.

Let’s summarise what I’ve covered in this video

• SIPP and Ready-made pensions will claim basic-rate pension tax relief on what you pay in automatically.
• Higher and additional rate taxpayers must claim extra tax relief direct from HMRC.
• If you have no income, you can still pay in up to £2,880 a year and get tax relief.
• Your employer can also get their own tax relief on money they pay into your pension.
• The standard pension annual allowance is £60,000 but can be lower for some people.
• If you go over your pension annual allowance, you might have to pay a tax charge.

Tax relief can make a big difference to your pension pot. I hope this video has helped you understand what you might be entitled to, and how to make sure you’re claiming it.