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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.
There are two main ways to save money into your pension:
This guide will only discuss this second option.
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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 and contributed £1,000 to your pension.
You get £250
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.
You will have to pay tax if you go above these limits.
If you’re a basic rate taxpayer (you’re earning under £50,000 in 2020/21), 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.
In one of these situations:
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).