This year, Pension Awareness Week runs from 11th – 15th September. Private Client Tax expert, James MacDonald, is starting the week by sharing a very brief summary of the rules around tax relief for personal pensions.
Relief is usually available for your private pension contributions. There is an annual allowance for tax relief on contributions of £60,000 for the current 2023-24 tax year. The annual allowance was £40,000 in 2022-23. These limits are “tapered” if your income is more than £360,000, reducing to a minimum of £10,000 (2023-24 figures).
It is important to note that the annual allowance applies to overall pension savings, so pension contributions made by an employer must also be taken into account.
Carry forward rule
There is a three year carry forward rule that allows you to carry forward any unused amount of your annual allowance from the last three tax years, provided that you were a member of a registered pension scheme in those years. There also used to be a lifetime limit for tax relief on pension contributions but this was removed with effect from 6 April 2023. You should bear in mind though that Labour has pledged to reverse that change if they are elected to government.
Tax relief rates
You can qualify for tax relief on private pension contributions amounting to 100% of your annual earnings, subject to the overriding limits. Tax relief is paid on pension contributions at the highest rate of Income Tax paid by the contributor.
This means that if you are:
- A basic rate taxpayer you get 20% pension tax relief. For personal contributions, the relief is given at source, so for every £80 paid into your scheme, the administrator reclaims £20 from HMRC and you do not need to do anything further.
- A higher rate taxpayer you can claim 40% pension tax relief.
- An additional rate taxpayer you can claim 45% pension tax relief.
Higher rate or additional rate taxpayers must claim back the further relief directly from HMRC, usually through your Self-Assessment tax return.
The above rates apply for claiming tax relief in England, Wales or Northern Ireland. There are regional differences if you are resident for Income Tax in Scotland.
Currently, you must have reached age 55 before you can access money in your pension fund. This will rise to 57 from 2028. It is also quite widely known that you can take up to 25% of your pension fund as a tax-free cash lump sum.
If you have started to receive taxable income from a pension, you can still get tax relief on contributions to a personal pension scheme until you reach age 75. The limit of contributions on which relief is available is however reduced to £10,000 per tax year and this is referred to as the Money Purchase Annual Allowance.
We can advise you on all tax aspects of pension planning but advice on, for example, choosing a pension provider and how your money is invested is classed as regulated financial advice, which can only be given by an authorised adviser.
If you have any questions or you would like further information, please get in touch with our tax team or your usual Ecovis contact.
For more information from HMRC, click here.
For more information about pensions, click here.