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14 April 2020

Hot topic

Tax relief – your secret helper

Nobody likes paying tax – that’s for sure. But, did you know you get tax relief on your pension contributions which helps you save more?

This means some of your money that would have gone to the government as tax goes into your pension instead.

Basically, tax relief is what makes pensions such a tax-efficient way to save.

The tax relief you receive is usually based on your highest tax rate. The table below shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,500 (the amount of income you do not have to pay tax on).

Band

Taxable income

Tax rate

Personal Allowance

Up to £12,500

0%

Basic Rate

£12,501 - £50,000

20%

Higher rate

£50,001 – £150,000

40%

Additional rate

Over £150,000

45%

 

How much tax relief will you get?

You usually get tax relief on pension contributions of up to 100% of your earnings, or £40,000 in each tax year (which runs from 6 April to 5 April) – whichever is lower. This is your Annual Allowance*.

Within a defined contribution (DC) scheme, your contributions – plus those paid by your employer on your behalf – are measured against the annual allowance. Within a defined benefit (DB) scheme, the value of the benefits you build up during the tax year are measured against the annual allowance. More details about how your benefits are valued for annual allowance purposes are in our annual allowance Read as you Need guide.

The amount of your DC contributions plus the value of your DB benefits built up over the tax year is called your pension input amount.

If you’re on a higher income, you might get a lower amount of tax relief. This is known as the Tapered Annual Allowance. It was announced in the Budget 2020 on 11 March that the income threshold for this allowance will increase from £150,000 to £200,000, effective from Monday, 6 April 2020.

The new rule will affect those who have an ‘adjusted income’ (taxable income plus pension input amount) above £240,000 – the £200,000 allowance plus the £40,000 Annual Allowance you can save into a pension.

However, the Annual Allowance reduces to a minimum of £4,000 instead of £10,000 from 6 April 2020, so some high earners won’t get as much tax relief.


More information 

Find out more at moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions.

For more information on the different types of allowances, visit the Read as you Need section.

View a Budget 2020 pension overview here.

 

 

 

 

*The Annual Allowance is a limit on the amount of your pension savings that can benefit from tax relief each year.

* Anyone with a taxable income exceeding £200,000 and an “adjusted income” over £240,000 will have their Annual Allowance reduced by £1 for every £2 of adjusted income over £240,000, up to a maximum reduction of £30,000. This is referred to as the ‘Tapered Annual Allowance’.