Pension Tax Relief
What is pension tax relief?
Pension tax relief is a bonus from the Government on any personal pension contributions you make. Some of the money that you would have paid in tax on your earnings goes into your pension instead. The percentage of relief that you receive is in line with the rate of income tax you pay. For example, if you wish to contribute £100 into your pension, you will only need to pay £80 to the pension scheme. The scheme administrator then reclaims £20 from HMRC, the equivalent to the basic rate tax you would have paid on £100 of earnings.
How is the tax relief claimed?
Pension tax relief can be claimed one of two ways. The first is net pay arrangements through work. This is where your pension contributions are deducted from your gross salary (before any income tax is paid) meaning that you only pay tax on what is left. Through net pay arrangements, you automatically receive relief at your highest rate of income tax.
The second is relief at source. This applies to all personal pensions and some workplace pensions. Contributions are made after any tax has been deducted. Therefore, you will only have to pay 80% of the contribution you wish to make, and the pension scheme will reclaim 20% from HMRC, an amount equal to basic rate tax. The relief can be claimed regardless of whether you earn enough to pay tax in the first place.
What happens if I pay higher or additional rate tax?
If you are a higher or additional rate taxpayer and receive tax relief at source, you can claim the additional 20% (higher) or 25% (additional) tax of any income you have paid 40% or 45% tax on, respectively. The additional relief is claimed through a self-assessment tax return by inputting the gross amount that you have contributed (your contribution and 20% basic tax relief). Your relief will either be paid as a rebate, a reduction in your tax liability or a change to your tax code.
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