The Basics of Pension Tax Relief
When you contribute to your pension, the government adds 20% tax relief at source. This process is done automatically when you pay into your pension. For instance, if you’re a basic rate taxpayer and wish to make a gross contribution of £100, you only need to pay £80, and the government tops up the remaining £20 as tax relief at source.
What About Higher Rate Taxpayers?
If you’re a higher or additional rate taxpayer, the process is slightly different but still beneficial. You’ll receive the same 20% tax relief at source when you pay into your pension. However, you can reclaim the additional tax relief through your tax return. So, you still pay £80 and receive £20 tax relief at source, but you can claim an extra £20 through your tax return, effectively reducing the net cost to £60.
Accessing Your Pension Tax Relief
Accessing your pension tax relief depends on the type of workplace pension scheme you have:
Net Pay Arrangement: If your pension contributions are deducted from your pay before income tax, you’ll automatically get the 20% basic rate tax relief. The tax relief is applied immediately, so you benefit there and then.
Relief-at-Source Arrangement: If your pension provider claims the 20% tax relief on your behalf and adds it to your pension pot, this is known as a ‘relief-at-source’ arrangement. All personal pensions and some workplace pensions operate in this way.
Claiming Additional Pension Tax Relief
Higher or additional rate taxpayers can reclaim further tax relief on their pension contributions. This can be done through your annual tax return. It’s a simple process that can substantially impact your retirement savings.