Tax relief on pension contributions

The government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief reduces your tax bill or increases your pension fund.

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How tax relief on pension contributions works

The way you get tax relief on pension contributions depends on whether you pay into an occupational, public service or personal pension scheme.

Occupational or public service pension schemes

Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what's left. So whether you pay tax at basic, higher or additional rate you get the full relief straightaway.

If exceptionally your employer can't deduct your pension contributions from your pay you can still get tax relief. You'll need to claim the tax relief you're due through your tax return, or if you don't complete a tax return by contacting HM Revenue & Customs (HMRC).

However, some employers use the same method of paying pension contributions that personal pension scheme payers use - read more in the section on 'Personal pensions'.

If you're a GP or dentist and contribute to a public service scheme you are taxed as self-employed for part of your earnings so should claim tax relief through your Self Assessment tax return.

Contact HMRC

Personal pensions

You pay Income Tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20%. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return or by telephoning or writing to HMRC. If you're an additional rate taxpayer you'll have to claim the difference through your tax return.

Contact HMRC

Retirement annuities

Unlike personal pension providers, most retirement annuity providers - personal pension schemes set up before July 1988 - don't offer a 'relief at source' scheme whereby they claim back tax at the basic rate. Instead you'll need to claim the tax relief you're due through your tax return, or if you don't complete a tax return by telephoning or writing to HMRC.

Contact HMRC

Effect of pension contributions on age-related allowances

If you receive an age-related Personal Allowance or Married Couple's Allowance HMRC will subtract the amount you contribute plus the basic rate tax from your total income and use the reduced figure to work out the value of your allowances. This may have the effect of increasing these allowances if your income was above the relevant 'income limit' that applies. To find out more about the income limits follow the links below.

More about age-related Personal Allowance

More about Married Couple's Allowance

There are limits on how much tax relief you can get - read more in the section 'Limits on tax relief'.

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What happens if you don't pay tax?

If you don't pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20%) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.

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Tax relief if you put money into someone else's pension scheme

You can put money into someone else's personal pension - like your husband, wife, civil partner, child or grandchild's. They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill. If they've got no income, you can pay in up to £2,880 a year - which becomes £3,600 with tax relief.

If the pension scheme rules allow it you may also be able to put money into someone else's occupational or public service scheme. You'll not get tax relief on your contribution but the other person can get relief either through their tax return or by making a claim to HMRC by telephone or letter.

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Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100% of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. If you earn less than £3,600 you'll still get tax relief on contributions up to that amount as long as you're paying into a personal pension or any other scheme that uses the relief at source method for giving tax relief.

The amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance for the tax year 2014 to15 is £40,000.

You pay tax on the amount of your pension savings for a tax year that is above the annual allowance plus any unused annual allowance you can carried forward. Use the link below to find out how:

  • the annual allowance affects you, including when you can carry forward unused annual allowance from a previous tax year
  • to work out the tax due on amounts above the limit

Understanding the annual allowance for pension schemes

Repaying tax if your pension contributions are refunded

You can usually only get your pension contributions refunded if you withdraw from an occupational or public service pension scheme within two years of starting payments. Certain events might shorten the time limit. For refunds made up to the end of the 2009 to 2010 tax year, tax is deducted at 20% for refunds of up to £10,800 and at 40% on any excess above this. For refunds made in the 2010 to 2011 tax year and later years, tax is deducted at 20% for refunds of up to £20,000 and at 50% on any excess above this. The scheme administrator deducts the tax before making the refund.

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More useful links

Pension schemes

Types of pension schemes

When a contribution is paid