One of the key incentives for someone who saves into a pension scheme is the tax relief on your contributions available from the government. It is a way of encouraging UK taxpayers to save for retirement.
Whatever income tax bracket you fall under, if you pay into a pension plan, you can claim pension tax relief and this article will explain how it works.
What is pension tax relief and who can get it?
Pension tax relief is a government incentive designed to encourage individuals in the United Kingdom to save for their retirement by providing tax benefits on pension contributions. It effectively offers a tax break on the money you contribute to your pension.
The key principle of pension tax relief is that contributions into a pension scheme are made from pre-tax income, meaning they are deducted from your taxable earnings. This reduces the amount of income tax you need to pay in the current tax year.
The government offers tax relief to encourage you to put money away for the future, instead of spending it now. Anyone below the age of 75 resident in the UK paying into a pension scheme can be eligible to claim pension tax relief on their pension contributions. This can include non-taxpayers as well, for example low-income earners.
How can a director of a UK limited company save in tax by pension contribution?
A director of a UK limited company can potentially save on taxes by making pension contributions through their own limited company. This approach is known as “director’s pension contributions” or “employer pension contributions.”
Here’s how it works:
Director’s Pension Contributions
As a director of your own limited company, you can make employer pension contributions on behalf of yourself as an employee. These contributions are considered a business expense and can be deducted from the company’s profits before calculating corporation tax.
By doing so, you effectively reduce the amount of taxable profit, resulting in lower corporate tax liabilities.
Additionally, as an employee of the company, you can also make personal pension contributions from your salary. These contributions are deducted from your earnings before income tax is calculated.
Therefore, you receive income tax relief at your marginal tax rate (basic, higher, or additional rate) on the personal contributions you make.
By combining both employer and personal contributions, directors can maximise their pension savings while enjoying the associated tax benefits. It’s important to note that there are certain limits and considerations to keep in mind:
Pension Annual allowance
There is an annual allowance, which sets the limit on the total amount of pension contributions that receive tax relief.
The annual allowance is set to £60,000 from 2023/24 and each subsequent tax year or your total taxable earnings if lower.
Pension Lifetime allowance
The lifetime allowance is the maximum amount of pension savings an individual can accumulate over their lifetime while still receiving tax benefits.
It is currently set at £1,073,100 for the 2023/2024 tax year. In previous years, you would have paid a lifetime allowance charge on any pension savings over this amount.
But from 6 April 2023 that charge has changed to 0%.
What happens if you go above the annual allowance?
If you go above the annual allowance in a pension scheme, you get a statement from your pension provider informing you about this. Or, If you are in more than one pension scheme, you may have to ask each pension provider for statements.
If you go over your annual allowance, either you or your pension provider are required to pay the tax.
It’s essential to ensure that pension contributions made through the limited company are reasonable and justifiable from a business perspective. HM Revenue and Customs (HMRC) may scrutinise contributions that appear excessive or not in line with normal business practices.
It’s highly recommended to consult with a qualified accountant or tax advisor who specialises in pensions to ensure you understand the specific rules and regulations and how they apply to your individual circumstances.
At Heighten Accountants, we can provide personalised advice tailored to your situation and help you navigate the complexities of pension contributions through a limited company.
How does pension tax relief work for a taxpayer on a payroll?
For each contribution you make to your pension plan, you will receive tax relief from the government.
For example, if you earn £100 as a basic rate taxpayer, you will typically pay 20% tax, meaning you will be left with £80.
If you contribute that £80 into a pension plan, the pension provider then claims back £20 from the government.
It is a significant uplift to the total value of your pension contributions.
The amount of pension tax relief you can claim is based on your rate of income tax.
- Basic rate taxpayers will receive 20% pension tax relief
- Higher rate taxpayers will receive 40% pension tax relief
- Additional rate taxpayers will receive 45% pension tax relief
How is tax relief on pensions calculated?
If you are a basic rate taxpayer and you pay £80 into your pension, the total contribution, including tax relief will be £100.
This is a 25% top up by the government.
If you are a higher rate taxpayer, you will receive the 25% boost by the government, and you can also claim another £20.
An additional rate taxpayer will also receive the 25% top up and can claim an extra £25.
What are the tax relief limitations on pensions?
The government has placed a limit on the amount of pension contributions you can get tax relief on, called the pensions annual allowance.
For the tax year 2023/24 this allowance is £60,000 increased from £40,000 in 2022/23.
For most people, the amount of pension contributions made personally, made by employers and the tax relief in total should not be higher than the annual allowance. If you make any contributions above this, you may incur a tax charge.
Unused annual allowance in a tax year may be eligible to be carried forward up to 3 years.
For higher income earners with an adjusted income above £260,000, the annual allowance starts to get reduced.
You can only get tax relief on pension contributions worth up to 100% of your annual earnings. If your earnings are lower than the annual allowance, then the tax relief is limited to the earnings.
If you have claimed relief on contributions above your earnings, HMRC can ask you to pay it back.
Additionally, you cannot claim tax relief if your pension scheme is not registered with HMRC.
How can you claim pension tax relief?
How you claim tax relief depends on the type of pension you are saving into.
- Net pay scheme – This type of pension scheme is used by some workplaces and deducts contributions directly from your salary before paying income tax. Tax relief is automatically applied at your highest rate of income tax and you therefore do not have to make an additional claim for relief.
- Relief at source schemes – This is all private pensions and some workplace pensions. With this type of pension scheme, HMRC will pay an additional 20% into the pension scheme.
Higher rate and additional rate taxpayers need to claim back an extra 20% and 25% tax relief respectively on the pension contributions.
These taxpayers can complete a self-assessment tax return to claim the full tax relief they are entitled to for the relevant tax year.
Pensions are long-term financial commitments, so it’s important to seek advice from trusted professionals and make informed decisions based on your individual circumstances and goals.
How can Heighten Accountants help you with pension tax relief?
Our team of expert tax advisors can help individuals and businesses with pension tax reliefs. Whether you are a company director or a high earning individual, we can assist you in several ways:
Advice on tax planning
Heighten Accountants can provide expert guidance on tax planning strategies to optimise pension tax relief. We can analyse your financial situation, income, and tax liabilities to determine the most effective approach for maximising tax relief on pension contributions.
Director and Limited Company Pension Support
If you’re a director of a limited company, we can help you integrate pension contributions into your overall financial strategy. We assist in determining the optimal balance between personal and employer contributions, considering factors such as corporate tax implications and available profit reserves.
Liaising with your Independent Financial Advisor
We can communicate with your Independent Financial Advisor (IFA). We can also handle employer’s administrative tasks, such as submitting contribution details and ensuring that the tax relief is applied correctly.
This saves you time and ensures smooth coordination between your IFA, pension provider, and HM Revenue and Customs (HMRC).
Other ways we can help you
- Compliance with regulations
- Calculation of tax relief
- Integration with company finances
- Recordkeeping and documentation
- Future planning and reviews
It’s important to choose qualified and experienced accountants who have knowledge of pensions and tax matters. We work closely with financial advisors who can provide personalised advice tailored to your specific situation, ensuring that you make the most of pension tax relief while complying with relevant regulations.
Please fill the form below so our team can contact you to schedule your call:
Pension tax relief FAQs
You can receive 40% on pension contributions if you are a higher-rate taxpayer (anyone earning over £50,270 in the 2023/24 tax year).
The first 20% is usually claimed automatically by your provider. You can then claim the additional 20% through your self-assessment tax return
You can get tax relief on up to the lower of 100% of your annual earnings and up to the annual allowance.
In the UK, eligibility for pension tax relief extends to a wide range of individuals. The key criteria for eligibility include:
Age: You must be under the age of 75 to receive tax relief on pension contributions.
UK taxpayers: To qualify for pension tax relief, you must be a UK taxpayer.
Pension scheme membership: You must be a member of a qualifying pension scheme.
Earnings: You must have earnings from employment or self-employment.
Contribution limits: The annual allowance sets a cap.
Up to 25% of your pension pot can be accessed tax free – with the remaining 75% available as taxable income.
When seeking UK pension advice, it is recommended to consult with a qualified and experienced professional who specialises in pensions and retirement planning. Here are several options to consider:
Independent Financial Adviser (IFA): IFAs are regulated professionals who provide independent advice on various financial matters, including pensions. They can assess your financial situation, goals, and risk tolerance to provide tailored advice on pension planning. IFAs have a duty to offer unbiased recommendations and can help you navigate the complexities of pension options, tax relief, and retirement planning.
Pension Specialist or Pension Consultant: These professionals specifically focus on pensions and retirement planning. They have in-depth knowledge of pension schemes, regulations, and tax implications. Pension specialists can provide comprehensive advice, including assessing your existing pensions, recommending suitable pension options, and developing a retirement strategy tailored to your needs.
Accountants/Tax Advisor: Accountants or tax advisors who specialise in pensions can provide valuable advice on pension tax relief, employer contributions, and tax planning strategies. They can help optimise your pension contributions from a tax perspective and ensure compliance with relevant regulations. However, it’s important to ensure they have specific expertise in pensions and are up to date with the latest pension legislation.
Pensions Advisory Service (TPAS): TPAS is a free, independent service funded by the UK government. They offer guidance and information on various pension-related topics, including state pensions, workplace pensions, and personal pensions. While TPAS can provide general guidance, they may not offer personalised advice tailored to your specific circumstances.
Employer Pension Scheme Providers: If you have a workplace pension, your employer’s pension scheme provider may have resources available to provide information and guidance on your pension options. They can explain the features of the scheme, contribution levels, and retirement options within the scheme.
When selecting a pension advisor, consider their qualifications, experience, expertise in pensions, and whether they are authorised and regulated by the Financial Conduct Authority (FCA) in the UK. It’s also advisable to check for any fees or charges associated with their services and to clarify their independence and any potential conflicts of interest.