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Pension tax relief: what you need to know

Paloma Kubiak
Written By:
Paloma Kubiak

Saving into a pension can reduce your tax liability, although the amount of relief you receive depends on your earnings. Below we list the key facts about pension tax relief.

When you contribute money into a pension scheme, the government gives you tax relief on the amount.

It’s a move to encourage UK workers to save for their retirement so some of the money that would have gone to the government as tax goes into your pension instead.

Essentially for every £1 in your pension pot, this amount is made up of a contribution from you and from the government and it means that higher earners pay less for every £1 accrued.

Here’s how the relief works:

Basic tax payers: receive 20% tax relief so it costs 80p to save £1 into your pension pot
Higher tax payers:
receive 40% tax relief so it costs 60p to save £1 into your pension pot
Additional tax payers:
receive 45% tax relief so it costs 55p to save £1 into your pension pot.

All taxpayers can claim tax relief on their pension contributions but while basic rate taxpayers receive their tax relief automatically – this is known as ‘relief at source’ – higher and additional rate taxpayers may not.

If you’re a higher or additional rate tax payer, you may need to claim the extra 20% or 25% relief from HMRC. See’s information on how to reclaim pension relief.

What if I don’t have an income?

If you’re not earning enough to pay income tax, you can still receive tax relief on pension contributions. You get basic tax relief (20%) on the first £2,880 a year you put in. If you contribute £2,880 into a pension, the government will top up your contribution to make it £3,600.

Are there limits on my contributions?

Yes. The annual allowance is currently set at £40,000 a year for everyone. It has already been reduced from £50,000 for the tax years between 2011 and 2014.

The annual allowance is the total amount of money you can pay into your pension pot every year, including contributions from your employer into a defined benefit or defined contribution scheme, tax-free. You get tax relief from the government on pension contributions up to this limit. Any contributions above the threshold are subject to income tax at your marginal rate.

So higher earners get more pension tax relief?

Yes, but in the Summer Budget the Chancellor confirmed plans to cut pension tax relief for the top earners through the Annual Allowance Taper.

From 6 April this year, anyone with an annual income of more than £150,000 (including the value of their pension) will see the maximum they can pay into a pension whittled down from £40,000 to £10,000.

This means for every £2 of income you earn over £150,000, your annual allowance will be reduced by £1 until it has fallen to £10,000 for those earning £210,000 or more.

In the worst case scenario, someone could lose £30,000 of annual allowance, which means they to pay a tax bill of £13,500 (45% tax on an excess contribution of £30,000).

But even people with incomes of £110,000 could get caught out by the taper if pension contributions, including their own and those paid by employers, push them above this amount.