How tax relief works

Pension tax relief is intended to help you save for retirement with money that would otherwise have gone to the tax man. This doesn’t mean you won’t have to pay tax on that money in the future, simply that you don’t have to pay tax on it now.

For example, a £1 contribution today costs you 80p if you’re a basic-rate taxpayer, as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax. Exactly how it works will depend on the way your pension scheme operates its tax relief. Rates of tax relief for Scottish Residents may differ to the rest of the UK. You can find out more here.

You’ll only get tax relief on contributions up to the amount you’ve earned in any given tax year. The amount of tax relief also depends on what rate of income tax you pay and the pension allowances you have available. You won’t get tax relief on any contributions made by an employer.

Pension tax relief

Read our factsheet to find out how tax relief could work for you.

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How the lifetime allowance works

If the total value of all your pensions (including salary-related schemes, personal pensions and any pensions that have already paid out an income or lump sum but excluding the State Pension) is close to £1.03 million, or is likely to reach this by the time you retire, you should consider the lifetime allowance (LTA).

The LTA is a limit on the total value of your pension benefits (excluding State Pension) that will enjoy full tax benefits (or before a tax penalty applies).

Once you exceed your lifetime allowance any excess may be subject to tax charges of 55% if you're taking the money as a lump sum or 25% if you’re taking the money as income (the income withdrawn will still be taxed like any other earnings).

You should check the value of your pensions regularly. You could be taxed if, when your pension is tested, it exceeds the lifetime allowance. It’s important to understand exactly how and when the test is applied, and what is included.

When is my pension tested?
How is my pension tested?

Protecting against the lifetime allowance charges

If you’re getting close to the pension lifetime allowance, there are things you can do to safeguard your money. These are known as ‘protection’ and they effectively give you your own lifetime allowance. But there are restrictions as well.

Lifetime allowance

Read our lifetime allowance guide to find out how this may affect your retirement planning.

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Annual allowances and how they work

While there is no limit on the amount you can save into your pension each year, there is a limit on how much you can save into your pensions each tax year while still benefiting from tax relief on your contributions, any employer contributions and any contributions made on your behalf by someone else.

For members with salary-related benefits it’s the value of the increase in those benefits that generally counts.

The three (or four) allowances Limits
2017/18 tax year 2018/19 tax year
1 The standard annual allowance
This applies to everyone who isn't affected by the specific rules for the other two allowances.
£40,000 £40,000
2 The tapered annual allowance
If you earn more than £150,000 in adjusted income, your annual allowance reduces by £1 for every £2 over this level - all the way down to a minimum of £10,000.
See our  TAA factsheet for full details

 

A sliding scale from £40,000 down to £10,000 A sliding scale from £40,000 down to £10,000
3 The money purchase annual allowance
Once you have taken taxable pension income from your pension pot using the 'pension freedoms', your annual allowance for contributions to money purchase pensions is reduced.

 

£4,000 £4,000
4 If you are an active member in a final slalary scheme, an alternative anual allowance is available for building up benefits in those schemes. Please speak to your scheme administrator for details. £36,000 £36,000

 

Annual allowance
Money purchase annual allowance (MPAA)
Tapered annual allowance (TAA)
Carry forward allowance
If you exceed your annual allowance

The value of investments can go down as well as up, so you may get back less than you invest. Tax treatment and eligibility to invest in a pension depend on personal circumstances. All tax rules may change in future.

This information is not a personal recommendation for any particular product, service or course of action. Pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please call our pension service centre on 0800 3 68 68 68 or refer to an authorised financial adviser.

Pension money cannot normally be withdrawn until age 55.