Tax Relief – Pension Contributions
Paying into personal pension schemes gives rise to tax relief but are you getting the full benefit of the tax relief available? The government encourages you to save for your retirement so they give you tax relief on the pension contributions. Tax relief can reduce your tax bill or increase your pension pot.
How tax relief on pension contributions works?
First of all you need to find out what type of scheme your contributions are paid into.
Occupational or public service pension schemes your employer takes the pension contribution from your pay before deducting tax. You are therefore receiving the tax relief straight away whether you are taxed at basic or higher rate.
Be careful though some employers use the same method as a personal pension scheme so may need to be handled using the Personal Pension Scheme method.
Personal pension schemes you pay tax on any earnings before your personal pension contributions are deducted. Your pension provider will claim back the tax at the basic rate which is added to your pension pot. This means for every £80 you personally pay into your pension pot you get £100. If you are a higher rate tax payer you can claim the difference:
- Through your tax return
- Telephone HMRC
- Write to HMRC
If you are an additional rate tax payer (over £150,000) then you must make the claim for tax relief on your personal pension contributions through your tax return.
How do I know if I am a higher rate tax payer?
The rates and bands will invariably change each year so it is worthwhile checking the HMRC website to ensure you know whether you are a higher rate tax payer. Here is a link to HMRC Income Tax Rates and Allowances for you to check.