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How pension tax relief works

Tax relief is designed to encourage you to put money aside for your retirement and is one of the benefits of saving through a pension. When you get tax relief, money that would otherwise have gone to the government as tax goes into your pension account instead. 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 income tax on it now.

Important information: The value of pension savings can go down as well as up, so you may get back less than you invest. The amount of tax you pay and whether you are eligible to invest in a pension will depend on your personal circumstances. All tax rules may change in future. Currently, you cannot normally withdraw money from your pension until you are 55.

Tax relief on your employer’s contributions

Usually, you would have to pay Income Tax on money you receive from your employer. But if the money is going into your pension as an employer pension contribution, no tax or national insurance is deducted from your employer pension contributions. So, you receive full tax relief on any contributions your employer makes to your pension.

  • For example, if you earn £2,000 a month and your employer’s contributions to your pension are 5%, the full £100 will go straight into your pension, no matter how much tax you would usually have to pay on it.

Tax relief on your own contributions

You can also receive income tax relief on any money that you pay into your pension yourself, but you may have to claim some or all of it from HM Revenue & Customs (HMRC). The way your tax relief is handled will depend on the type of pension you have, and whether you still work for the company whose plan it is:

  • ‘Net pay’ – this is how you receive your tax relief if your plan is part of the Fidelity Master Trust or has its own board of Trustees.
  • ‘Relief at source’ – this is the method used if your plan is a Group Personal Pension Plan or a Group Stakeholder Pension.
  • 'Salary Sacrifice’ - this method can be used by any type of pension scheme. Members agree to a reduction in salary in exchange for a pension contribution made by their employer. This means you are not taxed on the contribution. 

You might be able to work out what kind of arrangement your plan has through your payslip but, if not, check with your HR department.

If you no longer work for the company that runs the plan, you may still be able to make one-off contributions to your pension. In this case, the way you receive tax relief may be different, but it is still important to know whether the plan used ‘net pay’ or ‘relief at source’.

With a net pay arrangement, your regular pension contributions are deducted from your salary before any tax is deducted. This ensures you automatically receive all the tax relief you are entitled to and you don’t have to claim any more back from HMRC.

  • For example, if your monthly contribution is £100, the full amount will go into your pension. In contrast, if you just received this amount with the rest of your salary you might have £20, £40 or another amount deducted from it, depending on the rate of Income Tax you pay.

However, if you decide to make an extra one-off contribution into your pension, separately from your salary, you will have to claim your tax relief from HMRC. First of all, call us on 0800 3 68 68 68 to make the payment. Then contact HMRC to claim your tax relief. They will either send it directly to you or adjust your tax code to reduce the total amount of tax you pay over the year.

Remember that whether you benefit from tax relief will depend on what your total income is and how much tax you usually have to pay.

Pension tax relief guide

Our guide explains how tax relief works and how much relief you could be entitled to.

Call us

If you’d like to make an additional contribution to your pension, our pension associates will be able to help.

There’s a limit to tax relief

Most people are limited to contributions of £40,000 paid into their pension before they have to pay a tax charge, whether the contributions come from a company or an individual.

This information is not a personal recommendation for any particular product, service or course of action. Pensions 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 us on 0800 3 68 68 68 or speak to an authorised financial adviser.