Tax Relief on Pension Contributions

Getting tax relief on pensions means some of your money that would have gone to the government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

What are the limits?

If you’re a UK taxpayer, in the tax year 2017-18 the standard rule is that you’ll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.

  • For example, if you earn £20,000 but put £25,000 into your pension pot (perhaps by topping up earnings with some savings), you’ll only get tax relief on £20,000.
  • Similarly, if you earn £60,000 and want to put that amount in your pension scheme in a single year, you’ll normally only get tax relief on £40,000.

Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay.

The lifetime limit for the 2017/2018 tax year is £1 million and you will get tax relief on what you pay in under this amount.

  • For example, you could pay in £40,000 for 25 years and gain tax relief on the amount, after this you would have used your £1 million lifetime allowance and would pay 25% tax if paid into a pension or 55% tax if paid in as a lump sum.


Tax Tip

You can carry forward unused allowances from the previous three years, if you were a member of a pension scheme during those years.


Exceptions to the rule

If you have a defined contribution pension, and you start to draw money from it, the annual allowance reduces to £4,000 in some situations.

From April 2016 the £40,000 annual allowance is also reduced if you have an income of over £150,000, including pension contributions.

What if I earn less than £3,600.00 a year?

You can make gross contributions of up to £3,600 each year to a personal pension, self-invested personal pension, or stakeholder pension receiving basic rate income tax relief at, currently, 20% on your contribution.

You can pay in more than £3,600, but you don’t receive tax relief on the excess.

What if I have a pension with my employer?

If you belong to an employers pension scheme in most cases, your pension contribution will be deducted from your salary before tax is calculated. This means you get full tax relief on your contribution at your highest rate of tax straight away.

What if I have a personal pension?

If you pay into your own personal pension, you claim tax relief differently. The premium you pay is net of basic-rate tax and your pension provider claims the balance from HMRC. In 2017-18 and 2016-17, the basic rate of tax is 20%, so if you pay £100 a month into a stakeholder pension, your pension provider will claim a further £25 from HMRC, making the total amount paid in to your pension £125 a month. If you are a higher-rate taxpayer, you will need to claim relief for the additional 20% tax through your tax return

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