How to Claim Tax Relief on Pension Contributions

  • June 19, 2023
  • October 11, 2023
  • Shaz Nawaz
  • 8 min read

Nobody likes a hole in their bucket. Especially if that bucket is storing their future life savings. Tax relief is the ultimate end to your pension contributions dripping away to the government as tax. So, let’s discuss how to claim tax relief on pension contributions.

Let us give you a complete roundup on the pension tax relief procedures and limitations so that you can make wiser decisions for your future.

What is Tax Relief on Pension?

First things first. You must have clarity on what Pension Tax Relief is.

Pension Tax Relief is a government scheme that helps plan and save money for retirement without getting massively taxed on your contributions to the pension. You get tax relief based on the rate of income tax that you pay. Depending on the type of tax, you can either reimburse the tax that you already paid on a pension contribution or get relief directly at source. However, it depends on your pension scheme. You might not get tax relief if you don’t pay tax.

Relief on tax of this sort also gives you the benefit to invest in a private Pension such as Self-Invested Personal Pension (SIPP) but often it becomes confusing. We have answered in this article the questions that most people ask about pension tax relief and how it works. So, you can fully comprehend how to claim tax relief on pension contributions.

How to Claim Tax Relief on Pension Contributions in the UK

Now that you have a sense of what Pension Tax Relief is, you can better fathom how it saves one from continuous standard taxation on pension contributions. This will make sure that all your future buckets are brimming with your hard-earned pennies.

Leaky Bucket First Aid 101: there are two possible ways for this to happen. Either you close the hole emptying your bucket or you put a restoration pump to bring back all that you have lost. Add the technical taxation jazz and we call it Net Pay and Relief at Source Pension.

Understanding Net Pay

The Net Pay method allows you to make your pension contributions before the tax is deducted from your earnings. This results in an overall lowering of tax payment too because the tax to be calculated now is based on a relatively low amount.

Here’s a further break down of the procedure of Net Pay:

  • First, the employer goes ahead and deducts the entire amount of pension contributions from your salary, before applying any tax at all.
  • Your remaining UK earnings are charged with tax. As an outcome, your overall tax bill is lowered, and you can take more of your salary home.
  • You are availing tax relief directly due to paying lesser tax, despite of paying all the amount of your pension contribution from your own pocket.

The rate at which you pay tax will directly affect this method. Without even having to claim full tax relief, you get it.

However, if you don’t pay tax at all, you would not get any tax relief under the Net Pay method. Confused? Don’t give up already because we have more simplification in store for you. For this tricky bit, find a whole section as ‘If You Don’t Pay Tax’ below.

Understanding Relief at Source

With relief at source pension, you will have a boost in contributions at the end of the government.  If you pay above the basic rate, you can claim more back through tax return.

  • Employer goes ahead and normally deducts tax from your salary according to the UK tax system.
  • Then your pension contribution is taken from your after-tax-pay and sent straight to your pension provider. If you are self-employed, you can make contributions from your taxable earnings directly to the pension provider.
  • Finally, your pension provider claims 20% in tax relief from the government, which will become a part of your pension pot. If you are living in Scotland and paying according to the Scottish starter rate of 19%, still you will get 20% tax relief on your pension contributions.

The amount of money you receive as tax relief depends on the bracket of your tax. This method is particularly better for those people who don’t pay any taxes but still get tax relief. They can still learn how to claim tax relief on pension contributions.

 In addition, with such an arrangement in place, people paying higher than 20% rate of tax will have to claim the extra relief themselves. They can make the claim either through their tax return or directly from the HMRC. It does not matter if they are employed or self-employed.

Key Differences Between the Two

  • In both methods, same amount will be entered to your pension pot. But with net pay the full amount is taken from your pay.
  • if your pension scheme used the net pay method, it would not be possible for you to claim any money back from HMRC and you will taking slightly less pay home.

The following section covers considerations for these higher-rate-tax payers.

Higher-rate Taxpayers

The ratio of higher taxpayers is different. They pay 40% tax on their £100 earnings and receive £40 for every £60 they contribute to a pension.

Those who earn more than £150,000 a year are additional-rate income taxpayers, tax relief for them is 45%. So, they get £88.81 for every £100 they pay for their pension. There are also other different rules that apply for additional rate payers depending on circumstances.

Criteria Of Tax Relief on Private Pensions

Tax relief on a private Pension has a very important role in your pension.  It reimburses the tax that you have already paid based on the contributions you make.

Those who don’t pay tax or those who are basic-rate taxpayers will earn 20% tax relief. While those paying higher-rate-tax earn 40%.

Let us give you a simple example to get the maths without sweating calculators.

 The tax of basic-rate taxpayers on every £100 they earn is £20 after tax they will have £80. In the other case, they will receive £20 tax relief if they contribute this £80 to a pension, receiving back the tax they paid on that £100. That covers the criteria on how to claim tax relief on pension contributions.

What If You Don’t Pay Tax

If your earning is below the Personal Allowance (£12,570 in the tax year 2023/2024) then don’t pay tax. But if you are in a workplace pension, you might or might not get tax relief. It depends on the tax relief system your employer is working on.

Position of Non-Taxpayers if Their Employer Uses Net Pay Method

The simple mechanism of Net Pay method is to take the full amount of pension contribution from your pay before applying tax.

Subsequently, the relief comes in the form of a lower tax bill. But if you do not pay any tax, there cannot be any bill. You might have lower chance of tax relief on pension contributions in this case.  

To counter this the government is working out a way to claim tax relief on such contributions made in the tax year 2024-25 onwards. The details on this mechanism will most probably be out this year.

Position of Non-Taxpayers if Their Employer uses Relief at Source Method

The pension provider goes on to claim tax relief at the basic rate of 20% in this method. After taking the claimed amount from the government they add that to your bucket full of pension contributions.

In this scenario, if you are not paying in more than your relevant UK earnings, the benefit of 20% tax relief will still work for you.

How Can You Claim Tax Relief

How Can You Claim Tax Relief?

Regardless of your tax rate, you don’t need to do anything to claim tax relief at source into an employee pension.

In the same way, if you contribute to a private Pension like Self-Invested Personal Pension (SIPP) as a basic-rate taxpayer, you will not need to do anything to get a top-up of your tax relief.  It will automatically add to your Pension pot. Therefore, it is essential you know how to claim tax relief on pension contributions.

Can You Claim Tax Relief Back on Pension Contributions from Previous Years?

Given that you are an additional or higher rate and you have not claimed tax relief on past contributions, then there are chances that you can do something.

If you have missed claiming back tax within four years of the end of the tax year, then government allows you to claim back for those years.

Limits of Claiming Back Tax Relief on Pension Contributions from Past Years

There is no limit on the amount you save in your pensions each tax year. But there is a limit on an annual basis on the money that you can pay into a pension and earn tax relief.

Currently, the limit is 100% of earnings up to £40,000 for a year and the limit for a lifetime is £1 million. If your earning is £3,600 or less, the limit is £2,880. You will have to pay income tax into your pension on any payments that exceed these limits. Now you understand how to claim tax relief on pension contributions.

It is important for you to be aware of what relief can you claim as the tax relief makes a huge difference to your retirement income. If you understand the tax-claiming process, you can get the most out of what is available for you for free.

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