We're all told to put money into our pension, but do you know the basics?
Pensions
Pensions are tax efficient ways to save money for your retirement. Pensions can come in different shapes and sizes, each with its own purpose.
The most common type is known as a workplace pension which is arranged by an employer and sees both an individual and their employer contributing to the pension pot. Another option would be a personal pension (sometimes referred to as a private pension) which is set up by an individual, and the individual’s employer has no obligation to contribute.
An individual can contribute to multiple different pensions, so long as they stay within their annual and lifetime limits.
The UK government encourages individuals to save into their pension by effectively adding money to the pension tax relief.
Annual and Lifetime Limits
The government sets a limit on how much an individual can pay into their pension each year without incurring tax charges, this is called the ‘annual allowance’. For the 2023/2024 tax year the typical annual allowance is £60,000 per individual (which could be lower depending on your specific circumstances).
The government also sets a lifetime allowance which limits how much an individual can build in pension benefits over their lifetime while still enjoying the full tax benefits. At the time of writing, the lifetime allowance is set at £1,073,100. The lifetime allowance is being abolished from 6 April 2024.
Income Tax Relief
Tax relief on pensions is given so that some of the money that you, as an individual, would have paid in income tax on your earnings goes into your pension pot, rather than to the government. The relief is at the highest rate of income tax that you pay (20% for a basic rate taxpayer, 40% for a higher rate taxpayer, and 45% for an additional rate taxpayer).
It’s also worthwhile noting that individuals who don’t earn enough to pay any tax can still benefit from 20% tax relief on any pension contributions.
Corporation Tax
Pension contributions for employees through a workplace pension are tax deductible for corporation tax purposes.
In addition to this, companies can also make contributions to a director’s personal pension and obtain a deduction from profits which are later subject to corporation tax. This can be a great method for tax planning for limited companies and directors due to the high potential for efficient tax savings.
Opening a pension
Opening a pension can be daunting due to the number of products available on the market, which can make it difficult to make an objective decision. Fortunately, we can help you to navigate your options in terms of tax relief and can offer details of excellent financial advisors to help you choose a pension product which is right for you.
Frequently Asked Questions
Q. Do I automatically get tax relief on pension contributions?
A. For most people, the relief is provided at source via payroll. However, for higher or additional rate taxpayers, paying into their employers NEST (or other "relief at source" pension), you are probably not automatically receiving the right tax relief at source and you will need to contact HMRC, or file a tax return, to get it. As an example, for somebody earning £55k, contributing £3k into their pension, they are probably missing out on c.£600 in tax relief.
Q. How do I claim tax relief on my pension contributions?
A. If you pay into your pension through payroll, you should be getting tax relief automatically (Although see question 1 above). If you are contributing another way, you will likely need to claim relief by submitting a tax return to HMRC.
Q. Is there a limit to how much I can put into my pension each year?
A. There is no hard limit on the amount of money you can put in. However, there is a cap on how much tax relief you get on these contributions, known as the annual and lifetime limits, see above.
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