Tax Relief on Pension Contributions

There have been many many changes to how pension schemes are run and the tax relief on not only pension schemes but also pension scheme contributions in the last decade and indeed further back. Pensions are such a confusing thing to so many people that they take one look at the rules and regulations for pensions and decide they are too complicated and put them to one side.

There are however a few key things to know about pension contributions and tax relief on them. The way contributions are treated depends on what type of scheme you are in and whether it is a pension you have taken out yourself or a company scheme.

The essence is though that you get tax relief on your pension contributions at your highest rate of tax. If you pay tax at a rate higher than 20% though you will need to claim back the additional tax relief through your tax return. This can make pensions a very cost effective way of saving for your retirement, albeit the amount you can contribute is limited each year.

If the pension is a personal one then the provider will claim back tax relief on your behalf at 20% – any further tax relief you will need to claim back yourself.

If the pension is a company one then it is likely (but not always the case) that your pension payments will be deducted from your salary before your salary is taxed so you will automatically get tax relief on your contributions.

When you come to retire you are currently allowed to take 25% of your pension fund as a tax free lump sum (although there are hints that this may be decreased), subject to certain limits. The rest of your pension is however taxed when you receive it. However, if you are a higher rate taxpayer when you are paying contributions and then a basic rate tax payer when receiving your pension payments this can work in your favour.