Understanding private pensions and tax

When it comes to saving for retirement, understanding private pensions and tax is essential. Contributions to a private pension can provide tax relief, reducing your overall tax burden. 

This guide will explain how private pensions and tax interact, including how tax relief works, the limits on contributions, and when you may need to file a tax return.

How do private pensions and tax relief work?

When you save into a pension, you may receive tax relief, which is a key benefit of private pensions and tax planning. This means that the government will help boost your pension contributions by refunding some of the tax you’ve already paid on the money you contribute.

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.

How much tax relief can I get?

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

In the 2024/25 tax year, you are allowed to contribute either:

• 100% of your income in a year
• £60,000 a year – this is your ‘annual allowance’

From 6th April 2023, the pension lifetime allowance has been abolished.

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

This depends on the rate of income tax you pay. If you’re a basic rate taxpayer (you’re earning under £50,270 in 2024/25), 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’re a higher rate taxpayer (earn more than £50,270) – you submit it so you can claim the additional tax relief (another 20-25% on top of the automatic 20% relief)
• You contributed more than your allowance and you got too much automatic tax relief – you’ll need to pay it back
• Your pension provider is not using automatic tax relief (most do, though).

You can also call HMRC to claim if your income is between £50,271 and £125,140, and they’ll just give you your tax relief through your tax code.

Private pensions and tax for high earners 

If you’re an additional rate taxpayer (with an income over £125,140, including your pension contributions), the rules for private pensions and tax change. Your annual allowance will be reduced, and the calculation can get quite complex. As rule of thumb, if you earn over £200,000, you’ll typically be limited to contributing around £10,000 to your private pension (unless you use “salary sacrifice” or net pay).

The bottom line on private pensions and tax 

Understanding the rules around private pensions and tax is crucial to making the most of your retirement savings. By knowing how tax relief works and being aware of the contribution limits, you can ensure that your pension grows in the most tax-efficient way possible.