Making pension contributions

The UK Government is keen for its citizens to invest in their own pensions and provides generous tax reliefs for those that do. Tax relief is available to both an employee who wishes to contribute through an employer’s scheme and for an employer who is making contributions to their own approved scheme on behalf of their employees.

Contributions

Pension contributions of up to £60k (the Annual Allowance), a year may be made by an individual and tax relief is available at that individual’s highest tax rate. Here’s an illustration of the savings:

Assuming a contribution into a pension fund of £1000 –

It costs someone paying tax at the basic rate of 20% effectively £800
For someone who pays tax at the higher rate of 40% it would cost £600
To an additional rate taxpayer paying 45% tax, the net cost would be £550
(Different tax rates and savings apply to Scottish taxpayers)

A company (employer) paying into a pension fund can claim Corporation Tax relief on the full contribution amount, for some relief will be at a rate of 25%. This is an attractive option for contractors and entrepreneurs who run their business through a limited company who can reduce the taxable profits of their company whilst adding to their pension pot with help from the taxman. Contractors working under an umbrella employer, such as PayStream’s My Max, can choose to auto-enrol in their employer’s scheme or arrange for contributions to be made into their own personal pension plans.

Restrictions

Although tax relief for pension contributions is widely available to everyone there are some restrictions to be aware of:

Tax relief is only available to the contributor. An employee will be eligible for relief on their contributions. An employer will be eligible for tax relief on their contributions made directly or on behalf of an employee.
Pension contributions beyond the Annual Allowance of £60k are subject to a tax charge. However, if the Annual Allowance is not utilised, the unused portion can be claimed in a later year subject to a 3 year limit.
Tax relief for pension contributions are restricted to the amount of an individual’s Net Relevant Earnings in a year. If the person wants to put £15,000 into their pension fund but has earnings from employment of £10,000 and income from property letting of £20,000 in a year, tax relief would be available only on £10,000.
Depending upon their historical contribution record they may have some unused Annual Allowance available which could help them to reach their target investment.

Pension Contributions FAQs

Below are some of the frequently asked pension contribution questions we’re asked by our clients and umbrella contractors.

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I pay tax at 40% on my earnings and have monthly pension deductions of £200 taken from my salary and paid into my employer’s pension scheme. How do I claim the tax relief?

Your employer is likely to be operating a salary sacrifice arrangement under which your monthly gross salary is reduced by the £200 pension payment before it is subjected to PAYE and NIC deductions. That way you’re getting the tax relief at source but check your payslip or speak to your employer if you don’t think this is happening.

I’m keen to take out a personal pension plan. As a basic rate taxpayer how do I get tax relief on the payments I make?

Your pension advisor will explain in detail but effectively you will pay over your contribution after a 20% tax deduction. So if you want to invest £1000, you will pay over £800 and your pension provider will claim the balance of £200 from HMRC and add it to your pension pot.

Because I pay tax at 40%, my personal pension provider has told me that I’m entitled to tax relief of a further 20% over and above what they will be claiming back from HMRC. How do I put in a claim for it?

If you complete a Self-Assessment Tax Return, you can make a claim on that. You can also call or write to HMRC. If you know how much you’ll be paying into your pension you should be able to get a Tax Coding adjustment to give you the higher rate tax relief each year.

What is a S.I.P.P?

A SIPP is a Self Invested Personal Pension. It allows an individual a greater say in how the pension funds are applied. The advice of an independent pension or Financial Advisor should be sought if you are considering creating one. The tax advantages are the same as as those of a standard personal pension.

At what age can I start drawing my personal pension?

Generally, you need to be 55 years old. You can drawdown some of your pension as a tax- free sum and/or as taxable income. However, you should have an overall idea of your income levels and likely outgoings before deciding when and how much to take. Again, we recommend that you consult your pension or financial advisor to help you decide.

I’m about to retire and draw both my occupational pension from my former employer and my State Retirement Pension. How will tax be collected on my State Pension?

The Tax Code containing your Personal Allowance assigned to your occupational pension will be adjusted downwards to include your state pension and you’ll pay tax due on both pensions through PAYE on your occupational pension.

How far back can I claim higher rate tax relief on my pension contributions?

You can make backdated claims for higher rate tax relief on your pension contributions for the last four tax years.

Do dividends from my limited company count as relevant earnings for pension contributions?

No, but it is common for limited company directors to arrange for the company, as their employer, for the company itself to make pension contributions on their behalf. In that situation the company will obtain a corporation tax deduction.

What is the Annual Allowance Tax Charge applied to pension contributions?

It’s a charge which you must pay when you have gone above your annual allowance in a tax year. A number of different calculations have to be carried out. Depending upon arrangements with your pension provider you or the provider could end up paying the liability. If you think you have exceeded, or may exceed your allowance speak to your pension or financial advisor as soon as possible.

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