Pension Tax Relief

Two kinds of scheme give relief automatically, but some cases need a claim

Two types of pension scheme give relief automatically. In one, your employer calculates taxable pay only after removing your contributions, so relief is built in. In the other, your pension provider claims 20% from HM Revenue and Customs (HMRC) and adds it to your pot — a method called relief at source. If your scheme does neither, you need to claim the relief yourself, through your Self Assessment tax return or, if you do not file one, through a separate claim to HMRC. No relief is available on contributions to a pension scheme that is not registered with HMRC, and no relief is given if contributions are used to pay a personal term assurance life policy — one that ends on the first death or covers only family members — unless it is a protected policy.

Third-party contributions work differently depending on the scheme type. If a partner or anyone else pays into a relief at source pension for you, the 20% is added to your pot automatically. For contributions made by someone else into a workplace pension, you must claim the relief separately.

Under relief at source, higher and additional rate taxpayers claim the extra themselves

Relief at source covers only the first 20%. If your Income Tax rate in England, Wales or Northern Ireland is above that, you need to claim the additional relief yourself, and only on the income you actually paid the higher or additional rate on, not on your total contribution. On income taxed at the higher rate the extra relief is 20%; on income taxed at the additional rate it is 25%.

If you have already claimed relief and need to change it, HMRC's online claim tax relief service can be used for that.

Relief is capped at your earnings, with a separate limit for low earners

People under 75 who live in the UK may receive relief. It stops once your own contributions pass 100% of your annual earnings, unless that comes to less than £3,600, in which case £3,600 is the limit. If relief is given on more than the cap allows, HMRC can ask for the excess back, and keeping within it is down to you.

In a relief at source scheme, if you pay no Income Tax but have some earnings, your provider can claim 20% relief on contributions up to 80% of those earnings in the tax year. If you have no earnings at all, the provider can claim relief on contributions up to £2,880 a tax year.

Scottish taxpayers are treated differently on relief

If your Scottish Income Tax rate is below 20%, your provider still claims 20% for you and you do not repay the difference. If you pay above that, the extra relief you can claim is worked out at different percentages for each Scottish rate above 20%, unlike the rest of the UK.

The annual allowance can be reduced

Total contributions — yours and your employer's combined — are measured against the annual allowance. Pension savings above it face the annual allowance charge, collected at your marginal Income Tax rate.

The allowance can be reduced in more than one way. If your adjusted income and threshold income both exceed set limits, a taper applies and the allowance shrinks. If you have flexibly accessed any pension benefits, a lower money purchase annual allowance applies to further defined contribution savings.