If you're a UK basic rate taxpayer, you will get 20% tax relief automatically added by HMRC.
Every £800 paid into your pension you will receive an extra £200 from the government. This is an uplift in your initial premium of 25% before you start investing in the money.
If you're a higher, or additional, rate tax payer, you can reclaim further income tax by completing your annual tax return.
However, there are various rules that affect the amount you can contribute. You will get tax relief on pension contributions of up to 100% of your earnings in the current tax year or a £40,000 gross annual allowance, whichever is lower. We say gross because the £40,000 figure is your contribution + tax relief. Making a total of £40,000 contribution will cost you £32,000 and the government £8,000. This is powerful for your retirement planning.
For example:
If you earn £30,000 but put £35,000 into your pension pot, you will only legally receive tax relief on £30,000. Going over the limits would result in an annual allowance tax charge, so it is key to get advice on your contributions.
Carry forward is a very important rule for higher earners that allows you, under certain circumstances, take unused allowances from the previous three years and contribute more than the standard annual allowance. To do this you must have been in a member of a pension scheme during those years.
For example:
The current tax year + the previous 3 tax years allowance = £160,000.
If you earn £100,000 and have made £30,000 in pension contributions over the previous 3 years, you are able to contribute the full £100,000 into your pension by utilising the remaining allowance. You would contribute £80,000 and receive £20,000 in 20% rate tax relief, with the higher rate relief available through tax return.
There is an exception to this standard rule. If you have a personal pension, and you start to draw money from the pension, the annual allowance reduces to £4,000 gross.
Since April 2016, the annual allowance is also reduced if you have an income of over £150,000, including pension contributions, meaning higher earners could have a reduced allowance of £10,000 gross for pensions.
