Have you ever wondered about the subtle ways the government helps your pension? Look no further. Below, we have simplified pension tax relief, which plays a pivotal role in your financial plan.
What is Pension Tax Relief?
Pension tax relief is the government’s way of showing recognition. They do this by providing tax relief. This means some of the money that would have been taxed on your earnings goes into your pension.
Optimising Relief:
- Basic-rate taxpayers: 20% relief.
- Higher-rate taxpayers: 40% relief.
- Additional-rate taxpayers: 45% relief.
In Scotland, it’s essential to verify rates as they do vary.
An example: For basic-rate taxpayers, a £100 pension contribution translates to a net cost of £80. The government adds £20, taken in tax via your salary.
Navigating the Claim Process:
This will vary depending on the type of pension you have and the scheme’s preferred method. There are two main ways which we have explained below:
- ‘Net pay’ streamlines relief in certain workplace pensions. This means pension contributions will be deducted from your salary before income tax is paid and an automatic claim will be made back on tax relief at the highest rate of income tax.
- ‘Relief at source’ is the go-to for personal pensions, including private pensions and self-invested. This method requires higher-rate taxpayers to submit a tax return to claim extra relief.
Understanding the Limits (2023-24):
Pensions annual allowance is a limit on the amount of pension contributions on which an individual can earn tax relief, set by the government.
- For 2023-2024 it stands at a comfortable £60,000. Contributions exceeding this might face income tax at the highest rate.
Don’t forget – you can carry forward unused allowances from the past three years.
For Non-Taxpayers and Low Earners:
Non-taxpayers and Low Earners are entitled to 20% tax relief, this includes children and unemployed spouses. Keep in mind, that, as stated above, the maximum annual contribution is £60,000.
If you have questions about the above topic, we are here to help. Feel free to contact us via: 01686 610662 or info@whittakerandco.com
Tax on your private pension contributions: Tax relief – GOV.UK (www.gov.uk)
