Tax Relief on Pension Contributions

One of the primary benefits of contributing to a pension plan is that these contributions attract tax relief, which means that more money goes into your pension pot. The way in which you'll receive tax relief will depend on whether you pay into an Individual (personal) or occupational (company) pension scheme.

Individual Pension Schemes

In personal pension schemes, the pension provider will claim tax back from the government at the basic rate of 20%, which means that for every £80 you contribute to 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.

If you don't pay tax, then you can still benefit from basic rate tax relief (20%) on the first £2,880 a year you put in. This means that if you pay £2,880 into your pension, then the government will top this up to £3,600.

Occupational Pension Schemes

In these schemes, your contributions will be taken from your pay BEFORE your tax is deducted (but not before National Insurance contributions), which means that you will only be required to pay tax on the remaining salary. As a result, you will get the full tax relief immediately, whether you pay tax at the basic or higher rate.

Limits on Tax Relief

Although you can save as much as you like into any number and type of registered pension schemes, you may only receive tax relief on contributions of up to 100% of your annual earnings, subject to an annual allowance; you will be required to pay tax at 40% on any contributions above this annual allowance.

In 2009/10, this annual allowance was £245,000, rising to £255,000 in the 2010/2011 tax year. This amount will be frozen until 2015/16, and then the amount will be reviewed every 5 years.