How does the private pension tax relief work?

We've updated this guide on 25th July 2019

When you save into a pension, the government gives you a private pension tax relief.

This is more or less equal to the tax you paid on the portion of the income that you paid into your pension.

Do I get tax relief on all my private pension contributions?

No.

There are two main ways to save money into your pension:

  1. Net pay or salary sacrifice: your employer will deduct the pension contribution before calculating tax on your pay
  2. Relief at source: here, the pension contribution is deducted after tax is calculated. HMRC will pay you a part of your tax automatically (what you paid at the basic rate), and if you pay more than 20% tax then you’ll need to submit a tax return and claim the rest (another 20-25%). This is how most private pensions and SIPPs work.

This guide will only discuss this second option.

How much tax relief can I get?

Your annual income
£
Pension contributions
£
Select tax year
Pension contributions
£1,000.00
Automatic relief
£250.00
Pension contributions
£1,000.00
Automatic tax relief
£250.00
Your pension provider will automatically get this tax relief for you.
You don’t need to do anything.
Extra tax relief you can claim
£0.00

How your pension tax relief is calculated

HMRC will basically give you back the tax that you paid on the income that you used for your pension contribution.

In your case you earned £49,000.00 and contributed £1,000.00 to your pension.

Automatic Tax relief

You get £250.00

Your pension provider will automatically get this for you and add it to your pension pot.

Your pension pot will now be worth £1,250.00.

This is great – how much can I contribute into my private pension?

  • 100% of your income in a year
  • or £40,000 a year – this is your “annual allowance”
  • and also £1.03 million in your lifetime.

You will have to pay tax if you go above these limits.

Do I need to do anything to get the automatic tax relief?

If you’re a basic rate taxpayer (you earn over £50,000 in 2019/20), your pension provider will claim a 20% tax relief and add it to your pension pot.

In this case you don’t need to do anything.

When do I need to submit a Self Assessment tax return?

In one of these situations:

  • you earn more than £50,000 (the basic rate limit in 2019/20) – you submit it so you can claim the additional tax relief (another 20-25% on top of the automatic 20% relief)
  • or you contributed more than your allowance and you got too much automatic tax relief – you’ll need to pay it back
  • or if your pension provider is not using automatic tax relief (most do, though).

You can also call HMRC to claim if your income is between £50,000 and £150,000, and they’ll just give you your tax relief through your tax code.

What you need to know if you earn over £100,000

If your income, together with the pension contributions that you make, goes over £150,000, then your annual allowance will be reduced.

The calculation is pretty complex, so as a rule of thumb just remember that when you earn over £200,000 in income you’ll only be able to contribute about £10,000 to your private pension (unless you use “salary sacrifice” or net pay).

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