How does Pension Tax Relief Work?

Pension tax relief is a significant benefit. Every taxpayer is entitled to basic rate income tax relief on personal pension contributions up to an annual allowance of £60,000 (or 100% of total earnings, whichever is lower. This Includes contributions from yourself, your employer, any third party as well as tax relief paid to the pension). This 25% basic-rate tax relief from HM Revenue & Customs effectively means that every £1,000 you contribute becomes £1,250.

If you earn more than £50,270, you can claim even more tax relief on your pension through your individual tax return.

What Are Higher-Rate and Additional-Rate Pension Tax Reliefs?

Individuals earning over £50,270 can access higher-rate and additional-rate tax relief on top of the 25% basic-rate relief everyone receives.

The additional tax relief you can claim depends on your earnings over the higher rate tax band, currently £50,270:

• Higher-rate taxpayers can claim an extra 20% tax relief on earnings taxed at 40%, leading to a total of 40% pension tax relief. For example, a £10,000 pension contribution might effectively cost only £6,000.
• Additional-rate taxpayers can claim an extra 25% tax relief on earnings taxed at 45%, leading to a total of 45% pension tax relief. Thus, a £10,000 pension contribution might only cost £5,500.

Advantages of Higher-Rate and Additional-Rate Tax Relief

Higher-rate and additional-rate taxpayers can benefit from their extra tax relief in three ways:

• Lower annual tax bill
• Adjusted tax code (reducing the following year’s tax bill)
• Tax rebate

Are You Eligible for Higher Rate Tax Relief?

To qualify for higher-rate and additional-rate pension tax relief, you need to:

• Earn over £50,270
• Make personal or employee contributions to a “relief at source” pension scheme.

Practical Application

Jess, who earns £53,000 a year, wants to contribute £5,000 to her pension. She will automatically get 20% tax relief, meaning her £5,000 contribution effectively costs her £4,000. Additionally, because she earns £2,730 above the higher rate tax band, she can claim 20% extra tax relief on that amount, totalling £546. Combined with the £1,000 basic rate relief, her total tax relief is £1,546, making her net contribution £3,454.

If Jess earned £55,270 or more, her entire contribution would qualify for 40% tax relief, reducing her net contribution to £3,000.

How to Claim Higher Rate Pension Tax Relief

You can claim higher-rate tax relief on pension contributions in two ways:

1. Self-Assessment Tax Return: Complete your tax return online, including your total gross pension contributions for the relevant tax year.

2. Contact HMRC: Write to HMRC, using a template if needed, and ensure your personal tax account details are updated.

Claiming for Past Years

You can backdate pension contributions for up to three tax years. Claims for previous years can be made using the same methods as for the current year.

Workplace Pension Contributions

Most workplace pension contributions are deducted before tax, automatically providing tax relief at your highest rate. However, in schemes where contributions are taken after tax, higher or additional rate taxpayers will need to claim the relief themselves.

Workplace pension tax relief methods:

• Net Pay: Tax relief is automatically applied.
• Relief at Source: Higher rate relief needs to be claimed if not provided by your pension provider.
• Salary Sacrifice: Tax relief is automatically applied.

If you’re still confused by any of the above why not use our contact link below to see if we can help with any of your pension queries.