You can pay as much as you like into your pension scheme, and there's no limit on how much pension you can get. However, there's a limit on how much tax relief you get. How pension scheme payments are taxed depends on the type of payment being made.
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Pension schemes that are registered with HM Revenue & Customs (HMRC) can qualify for tax relief on:
Most pension schemes are registered because of the tax advantages, but a pension scheme doesn't have to be registered.
Tax relief may be given on employer contributions to a non registered pension scheme, but there's no tax relief on:
Payments from a non-registered scheme, including lump sums, are taxable.
Technical guidance on the tax treatment of non-registered pension schemes
There's no limit on the amount of contributions either a member or an employer can pay into their pension scheme.
Tax relief on member contributions is limited to 100 per cent of your earnings. If you earn less than £3,600 you can get tax relief on contributions up to that amount as long as the scheme uses the relief at source method for giving tax relief - more in the link below.
Employers may get tax relief on contributions they make in respect of their employees. Tax relief on large employer contributions may be spread forward over up to four tax years.
Tax relief on pension contributions
Relief at source for pension schemes
Technical guidance on employer contributions
Although there's no limit on the amount you can pay into your pension scheme there's a limit on the amount of pension savings you can build up each year that benefits from tax relief. This is called the annual allowance. If your pension savings for the year are more than the annual allowance you'll pay tax on the excess.
Understanding the annual allowance for pension schemes
Although there's no limit on how much pension you can be paid there's a limit on the amount of pension savings you can build up over your lifetime that benefits from tax relief. This is called the lifetime allowance. At certain points the amount of your pension savings will be tested against the lifetime allowance. This normally happens when you start taking your pension. If your pension savings are more than your lifetime allowance tax is due on the excess. This tax is payable by both you and the scheme administrator.
Understanding the lifetime allowance for pension schemes
The income and capital gains of most pension scheme investments qualify for tax relief. Pension schemes can invest in whatever they like, but if certain conditions aren't met there may be tax charges on the investment. There are extra conditions on investments made by investment-regulated pension schemes where the member has the ability to choose how their own pension pot is invested.
In deciding how a scheme investment will be taxed you need to consider:
Pension scheme investments and tax
As a condition of getting tax relief the government want pension schemes to use their funds to provide certain benefits, such as a pension for life. The tax rules define these benefits as authorised payments and specify the conditions that need to be met for payments to be authorised. Any other payment is classed as unauthorised and tax charges are payable.
Certain scheme transactions are also unauthorised payments.
Unauthorised payments are subject to the following:
Unauthorised payments from pension pots
You must normally be at least 55 before you start taking your pension. You may be able to start your pension earlier if you're retiring due to ill health.
Your pension should give you a pension payable for life. Depending on the type of pension scheme you belong to you will have various options as to how you take your pension.
Your pension will be taxable. How much tax you'll pay depends on your overall taxable income after your tax-free allowances.
Your pension will be paid to you by your pension or annuity provider with tax already taken off via the PAYE (Pay As You Earn) System.
Taking payments from your pension pot
Tax on workplace, personal or foreign pensions
You're usually able to take part of your pension pot as a tax-free lump sum when you start taking your pension. Your tax-free lump sum cannot be more than either:
Your pension scheme administrator will be able to tell you what the maximum tax free lump sum payable from their scheme is.
More about tax-free lump sums on retirement
If you withdraw from a workplace pension scheme within two years of joining your scheme may refund your contributions. Certain events may shorten this time limit.
Your scheme administrator will deduct tax before making the refund. Tax is deducted at 20 per cent for refunds of up to £20,000 and at 50 per cent on any excess above this.
If your pension pot is small the whole amount may be paid to you as a lump sum. This type of lump sum is often called a trivial lump sum - more in the link below.
You may also have a pension pot of up to £18,000 paid to you as a lump sum if both the following apply:
These lump sums are taxable. How much tax you'll pay depends on your overall taxable income after your tax-free allowances. Your pension scheme administrator will take off tax using the PAYE (Pay As You Earn) System.
Taking a small pension pot as lump sum
You may take all your pension pot as a lump sum if you're retiring due to ill health and you're not expected to live for longer than a year.
If you're under 75 your serious ill health lump sum will be tax free as long as you haven't used up your lifetime allowance. If you have used all of your lifetime allowance you'll pay a 55 per cent tax charge on the excess.
If you're 75 or older, 55 per cent tax is due on the whole lump sum. The scheme administrator should deduct this tax before paying the lump sum.
More about serious ill health lump sums
If you die before you start your pension your scheme may pay a 'death in service' lump sum. If you die before you're 75 this lump sum is usually tax-free if you haven't used up your lifetime allowance.
If you're 75 or older when you die 55 per cent tax is due on the whole lump sum. The scheme administrator should deduct this tax before paying the lump sum.
Pension schemes can also pay a lump sum death benefit if you die after you start taking your pension. These lumps sums are usually taxable at 55 per cent. The scheme administrator should deduct this tax before paying the lump sum.
What happens to your pension savings when you die
These pensions are taxable. How much tax you'll pay depends on your overall taxable income after your tax-free allowances.
Your pension will be paid to you by your pension or annuity provider with tax already taken off via the PAYE System.
