How do Relief at Source pensions work?

Relief at source is one of the methods through which you can receive tax relief on your pension contributions. It's a system where a portion of your taxes are redirected into your pension pot, essentially decreasing your tax bill and increasing your retirement savings.

How Relief at Source Works

Here’s a simple breakdown of how relief at source functions:

1. Contributions are Made from Post-Tax Income
   Whether you're employed or self-employed, your pension contributions are deducted from your after-tax salary. This means your employer takes your pension contribution from your salary after it has been taxed.

2. Claiming the Tax Relief
   Your pension provider then plays a crucial role. They automatically claim tax relief at the basic rate of 20% from the government on your behalf. This amount is then directly added to your pension pot, lifting your total savings.

3. Additional Relief for Higher Rate Taxpayers
   If you pay tax at a higher rate (above 20%), you can claim further tax relief through your tax return or directly from HMRC.

4. Universal Benefit
   One of the perks of relief at source is that even non-taxpayers receive the 20% tax relief on contributions (up to a certain limit).

The TLDR

Relief at source provides an automatic boost to your pension contributions through the basic rate tax relief. It provides a straightforward way to receive tax relief on pension contributions without any hassle.

Most personal pension schemes and many workplace pension schemes operate Relief at Source mechanisms.

Remember, managing your pensions effectively really helps maximise your benefits. Consider using services like Penny to consolidate your old workplace pensions into one account, making it easier to view, manage and invest your retirement savings.