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How pension tax relief works and how to claim it

Did you know? If you’re paying into a personal pension or SIPP (Self-Invested Personal Pension), you’ll receive tax relief on your contributions – here’s how it works.
How pension tax relief works and how to claim it
Reading time: 5 mins

If you want to take control of your retirement, it’s important to plan ahead and look at all the options available.

And a good way to make the most of your later life could be to open a personal pension. Also known as SIPPs (Self-Invested Personal Pension), personal pensions are designed to give you control and flexibility over your retirement pot.

You can make your own pension contributions, and invest your money in a large range of investments, such as shares, bonds, and property. Even better, with a personal pension, you’ll receive a little gift from the government in the form of tax relief.

How does pension tax relief work?

For each contribution you make to your personal pension, you’ll receive tax relief from the government to compensate for the income tax you’ve already paid.

For example, if you earn £1,000 as a basic rate UK taxpayer, you’ll typically pay 20% tax, meaning you’ll be left with £800. If you pay that £800 into a pension, you’ll receive the £200 back as tax relief from the government.

Why is the top up 25% and not 20%?

The HMRC tax relief for a standard rate taxpayer is 20%, however this is the equivalent of a 25% top-up, as it compensates for the tax you paid ‘at the source.’ As such, you’d receive £200 for every £800 you pay in, and £200 is 25% of £800 – so, in other words, you’ll receive a 25% top-up for every contribution you make.

What if I’m a higher or additional rate taxpayer?

Higher rate taxpayers are eligible for 40% tax relief, and additional rate taxpayers are eligible for 45%. In other words, in order to invest £1,000 in your pension, you’d need to pay in less than a basic rate taxpayer. Here’s how much you’d need to contribute to have a pension pot worth £1,000:

NB: Different tax brackets apply in Scotland and so these amounts will be different for higher and additional rate taxpayers. 

Are there any limits?

As things currently stand, total contributions across all your pensions should not exceed £60,000 each tax year, or 100% of your earnings (whichever is lower). This pension annual allowance includes any contributions made by you and the government.

Anything over this won’t be eligible for tax relief, and may be subject to income and capital gains tax.

If you’ve already started taking an income from your pension or you don’t have any UK earnings you can still pay into a personal pension, but your annual allowance will be much lower, and you’ll only be able to contribute up to £3,600 (including tax relief).

There’s no limit on the total amount of pension savings you can build up. However, you’ll pay tax if your pension pots are worth more than the lifetime allowance, currently set at £1,073,100 for the tax year 2024/25.

This is a high amount, and so won’t apply to most people. You can check with your pension provider to see how much of your lifetime allowance you’ve used.

How do I claim pension tax relief?

The way tax relief is claimed depends on the type of pension you’re paying into. Generally speaking, if you have a personal pension, you’ll need to contact HMRC to claim your top-up. However, with Wealthify, there’s no need to fill out forms or wait weeks to get your money.

If you hold a Wealthify Pension, your 25% top-up will automatically be added to your pot every time you contribute. You won’t need to do anything; we’ll arrange the payments on your behalf.

However, if you’re a higher or additional rate taxpayer and eligible to receive a higher top-up, you’ll need to complete a tax return to claim the additional tax relief.

Are there any other tax advantages with personal pensions?

Yes! With a personal pension, you get to invest tax-efficiently. Usually, when you invest, there are two types of tax you may end up paying on the profits and earnings you make: capital gains tax and income tax.

But with a personal pension, you don’t need to pay these taxes, meaning you get to keep more of your money. And that’s not all! From the age of 55, you’ll be able to withdraw up to 25% of the money in your pension as a tax-free lump sum.

How to open a personal pension

Starting a personal pension can sound like a big job, but it doesn’t need to be. With digital investment platforms, like Wealthify, opening a pension is easy. All you need to do is choose the risk level that suits you, how much you want to put in your personal pension, and then start your SIPP adventure with just £50.

We’ll do the hard work for you, from building your pension to managing it on an ongoing basis. But it doesn’t stop there! With Wealthify, you’re in control since you can check how your pension is performing anytime, anywhere.

Do you know how much you’ll need in your pension pot for your dream retirement? Our new pension calculator can help give you a good idea of what you might need to save.

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested

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