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How does tax relief work?

Under current tax arrangements all personal contributions into defined contribution pensions receive tax relief at the tax payers marginal tax rate.

 

 


 

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When making payments into a personal pension plan, taxpayers will receive basic rate tax-relief at a rate of  20%.This means that when a  tax payer makes a net payment of £80 into their pension, this will automatically be increased to £100, with the government paying the £20 via tax-relief.

Higher rate tax payers can obtain relief up to their highest marginal rate but this must be reclaimed via HMRC directly. 

You can make payments into your pension and receive tax-relief at your marginal tax rate up to age 75. Please note, individuals who are part of a salary sacrifice scheme will automatically receive tax relief as their contributions are taken from their pre-tax salary. This means they will not receive any further tax-relief on their contributions. 

This rule applies even if you do not have relevant UK earnings tax as HMRC allow anyone to contribute up to £3,600 to most types of pension in any tax year without any evidence of earnings (subject to the eligibility criteria). This means that if you have a partner with no relevant UK earnings/ unemployed, you may still wish to open a pension for them. They will be able to contribute a max of £2,880 each year, and receive the Government tax-relief of 20%, making their total contribution for the year £3,600.

Tax-relief can be particuarly beneficial for individuals who are higher-rate or additional-rate taxpayers when making contributions, then drop to basic-rate taxpayers at retirement. Careful tax planning may be required. 

However, it is important to note that there are limitations on how much you can pay into your pension and receive tax-relief. Visit 'How much can I pay into my pension each year' for further information.