Tax relief

The government wants us to save for retirement and incentivises us by offering tax relief on pension contributions. This gives your pension investments an instant boost. As a basic rate taxpayer, every £80 you pay in becomes £100 in your pension pot. That’s a 20% boost. Higher and additional rate taxpayers can claim extra relief beyond this initial 20% by completing a self-assessment form. You’ll either get the tax relief automatically, or you’ll have to claim it yourself. It depends on the type of pension scheme you’re in and the rate of income tax that you pay.

You can get tax relief on pension contributions worth up to 100% of your annual earnings or £60,000, whichever is lower. There are two kinds of pension schemes where tax relief is paid automatically. One is called net pay, where your employer takes workplace pension contributions out of your pay before deducting income tax. The other is relief at source, where your pension provider claims tax relief from the government at the basic 20% and adds it to your pension pot. You can get relief at source in all personal pensions and some workplace pensions.

It will not be automatic if you pay income tax at a rate above 20%, and your pension provider claims the first 20% for you through relief at source. In this case, you’ll need to claim tax relief on pension contributions yourself. Lots of people miss out on claiming higher rate tax relief because they don’t realise this is not automated through relief at source schemes. If you’re unsure whether you need to claim tax relief for your pension, you should ask your employer how your pension benefits from tax relief. Is it net pay or relief at source? You can claim this additional tax relief through your self-assessment tax return.

Tax relief is one of the biggest advantages of saving into a pension. It’s like getting an instant boost from the government every time you contribute; whether it’s added automatically or something you need to claim, it means more money going into your pot for the future. The important thing is to make the most of it by contributing what you can, so you’re not missing out on free money that can grow over time and help you build a more secure retirement.