A simple guide to pension tax relief
Jan 7, 2024
Grow Your Pension Faster with Tax Relief
One of the most appealing aspects of putting money into a pension is the benefit of tax relief. Think of it as a little bonus to your retirement savings. For every 80p you put into your pension, the government adds an extra 20p as tax relief, provided you qualify. This means that your pension savings could grow faster than you might have planned!
How Does Pension Tax Relief Work?
Simply put, the government's tax relief is at a basic rate of 20%. Usually, this portion of your income would be taxed, but with pensions, instead of going to the government, it goes straight into your pension pot where it can grow over time. The more you contribute, the more tax relief you can receive, enhancing your future savings.
Is There Anything I Need to Do?
For the majority, there’s no extra effort required. Your pension provider handles the recovery of the tax relief and automatically adds it to your pension pot. If you are a higher or additional rate taxpayer, however, you may claim extra relief through your tax return or directly with HMRC.
When Will I See the Tax Relief in My Account?
It might take a little while because your pension provider needs to claim this relief from HMRC. Generally, expect to see the additional money in your pension account within about three months.
What Contributions Qualify for Tax Relief?
Tax relief is granted on personal contributions, that is, money you add from your salary or as extra top-ups. It’s worth noting that tax relief does not apply to any contributions your employer makes.
Is Tax Relief Different From The 25% Tax-Free Allowance?
Yes, these are two separate perks of having a pension. The 25% tax-free allowance refers to the money you can withdraw tax-free from your pension once you reach the age of 55 (which is set to increase to 57 from 2028). On the other hand, tax relief contributes directly to increasing your savings during your working years.
Understanding Income Tax Rates and Benefits
All eligible taxpayers receive a 20% tax relief on pension contributions. For those on a higher tax bracket, there’s an opportunity to claim additional relief, which can be quite beneficial. Remember, this additional relief is not paid into your pot but directly benefits you.
Summary
Pension tax relief might sound complicated, but it's essentially a helpful boost from the government making your retirement savings grow healthier. With little or no action needed on your part, it’s an effortless way to build a more secure future. Remember, if you have several old workplace pensions, bringing them together with Penny could make managing your pension and understanding benefits like tax relief even simpler.
