More people are saving into pensions than ever before, but many risk missing out on valuable tax relief by failing to claim their full entitlement. According to the latest figures from HMRC, £24.8bn was contributed to personal pensions in 2016-17, an increase of £0.5bn when compared with the £24.3bn contributed in 2015-16.
Here we explain more about ways to maximise your pension tax relief
More people are claiming tax relief
Gross pension tax relief in 2016-17 was £38.6bn, up from £38.5bn in 2015-16. HMRC said that this increase is partly due to the introduction of automatic enrolment, which has boosted the number of people saving into pensions. There were 10.3 million people contributing to a personal pension in 2016-17 but only nine million in 2015-16. However, average annual contributions per person fell to £2,400 in 2016-17, which is down from £2,540 in 2014-15.
Tax relief for basic-rate earners
One major benefit of contributing to a pension is the boost your retirement savings will receive from tax relief. Pension providers can claim basic-rate tax relief at 20pc on behalf of savers. So for every £80 you contribute, £100 will be invested into your pension.
Additional tax relief for high earners
However, if you’re a higher- or additional-rate taxpayer, you must claim back the additional 20pc or 25pc on top of the basic 20pc via your self-assessment tax return. If you don’t claim it, you won’t get it. This extra tax relief means that a higher-rate taxpayer would only need to pay £60 to achieve the same £100 of pension savings, while an additional-rate taxpayer would only need to contribute £55.
Tax relief for low-income earners
You’ll still benefit from tax relief even if your income is too low to pay tax. If you’re a non-taxpayer, the maximum you can pay into your pension is £2,880, which is equivalent to a £3,600 contribution once tax relief is added. You can carry forward unused annual allowances from the previous three years, as long as you have been a member of a pension scheme during that time and have used up your current year’s annual allowance.
Stay within the annual limits
There is a limit on the amount you can contribute to your pensions each year tax-free, which is called an annual allowance. This tax year (2018-19), the annual allowance is £40,000. The allowance is tapered for high earners, which means that for every £2 of income above £150,000, £1 of annual allowance will be lost. Anyone earning more than £210,000 will have their allowance capped at £10,000. There is also a lifetime allowance, which is a limit on the amount of pension benefit that can be drawn from pension schemes without triggering an extra tax charge.
It’s vital to stay within these limits or you could incur a tax liability. HMRC figures from a September 2018 report show that the amount contributed to pensions exceed annual limits, which will therefore attract a tax charge, increased from £143m in 2015-16 to £517m in 2016-17. The number of cases where schemes paid tax bills because people exceeded the lifetime allowance almost doubled over the year, up from 1,180 in 2015-16 to 2,120 in 2016-17. The amount raised from these charges increased from £66m to £102m.
Why pension advice matters
Pension rules can be complicated and they change over time so it’s important to seek professional advice if you’re uncertain how much pension tax relief you’re eligible for. An adviser can review your existing pension arrangements and ensure you are taking full advantage of all the tax reliefs and allowances available.
For comprehensive expert advice, visit The Telegraph’s Investments & Savings service.
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The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief depends on individual circumstances.
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