Don’t forget to make the most of your UK pension tax relief allowance for 2022/23. The more tax relieved pension contributions you make, the larger your retirement fund can grow and the smaller your overall income tax position.
For the 2022/23 tax year, the annual allowance for UK tax relief on pension contributions is capped at £40,000 or 100% of your UK earnings (whichever is less).
However, even if you don’t earn anything at all, there are still opportunities for anyone under 75 years old to make pension contributions and receive tax relief on them. Keep reading to find out how you can take full advantage of your UK pension tax relief allowance before the end of year tax deadline on 5th April 2023.
How does HMRC pension tax relief work in the UK?
When you pay into a pension you can get tax relief on some, or all, of those pension contributions, so long as certain conditions are met (you are earning income and under age 75). This means you do not pay income tax on the money you choose to set aside in your pension.
There are limits to the amount of contributions which can attract tax relief, explained later.
Is UK pension tax relief automatic?
You automatically get full tax relief on your pension contributions if your employer takes them from your pay before deducting income tax from your salary. There is nothing further for you to do.
Alternatively, if you receive your salary each month and pay into a private pension yourself you will be contributing from your net (or post tax) income. Therefore, your pension provider will claim 20% tax relief for you and add it to your pension pot. This means UK pension tax relief is automatic for basic rate taxpayers. You get the 20%, even if you only pay the Scottish starter rate of Income Tax at 19%.
Do I need to claim tax relief on pension contributions?
In the following scenarios, you will need to actively claim tax relief as it will not happen automatically:
- You pay a higher rate of UK income tax than the 20% basic rate (unless your employer deducts your pension contributions before your income tax, as mentioned above)
- The private pension scheme is not set up to claim automatic tax relief
- Someone else pays into your pension, either for you or with you
How do I claim tax relief on pension contributions?
As with the scenarios mentioned above, if your pension tax relief will not be given automatically you will need to claim tax relief via a Self-assessment Tax Return each year. This is due by 31st October following the end of each tax year if done on paper, and by the 31st January following the end of the tax year, if done online.
How much UK pension tax relief can I claim?
The limit on pension contributions which can benefit from tax relief for the 2022/23 tax year is £40,000 or 100% of your UK earnings. This is also known as your tax free pension contribution allowance, or annual allowance. This is set by the UK government as part of its annual budget announcements. If you make extra pension contributions beyond £40,000 or that exceed 100% of your annual UK earnings, you will pay income tax on the extra pension contributions you make.
The table below shows how tax relief reduces the ‘real’ cost to you of making a pension contribution, per £100 contribution for a Scottish basic, higher and additional rate taxpayer.
Can I get tax relief on pension contributions if I have no income?
Yes – you can get 20% tax relief on your pension contributions up to £3,600 every year, even if you have no earned income. For example, if you pay £2,880 into your pension this will automatically be topped up to £3,600 as your personal pension provider claims tax relief for you.
Can I pay into a pension for someone else, and if so, who gets the tax relief?
You can pay into someone else’s pension and these contributions don’t count towards your contribution limits (but they count towards theirs).
This means you can contribute to a pension for your partner, children, or grandchildren for example. Their pension provider will automatically apply 20% tax relief, and the recipient can claim additional relieve at their marginal rate if their marginal rate is higher than that. There are additional limits to how much you can gift by way of a pension contribution under inheritance tax rules, but making such contributions for your family can be a great way to give them a good start in life in their retirement savings journey (you can contribute to a pension for someone from birth, if you want!) and also may help with your estate planning for inheritance tax purposes.
What is the pension tax relief annual allowance for high earners?
There are scenarios where high earners of around £240,000 or more annually may be subject to a ‘Tapered Annual Allowance’, which can be as low as £4,000. However, the precise calculations of who this applies to are complicated. Please get in touch with us directly for advice on allowance tapering and for guidance on how to maximise pension tax relief for your unique financial circumstances.
Are there exceptions to the £40,000 annual allowance for non high earners?
There are several scenarios where you cannot claim tax relief on the maximum £40,000 annual allowance, and one scenario where you can actually claim tax relief on more than the usual £40,000 limit.
Scenario 1: When you cannot claim pension tax relief on £40,000
You cannot claim tax relief on the maximum annual allowance of £40,000 if your UK earnings are less than £40,000. Also, if you are over the age of 75 you can no longer claim tax relief on any pension contributions you make.
For example: Jim earns £35,000 per year but makes no regular pension payments. However, he has a savings pot of £40,000 that he would like to use to kick-start his pension. As Jim only earns £35,000, he can only make a tax-relieved contribution of £28,000, to his pension. This will the be topped up to £35,000 (equal to 100% of his UK earnings) when his pension provider automatically adds on tax relief for him. Even if Jim contributed his full £40,000 savings to his pension, he would still only receive tax relief on £28,000 for this current tax year. With this in mind, it is very likely that Jim should wait until the start of the next tax year to contribute the remaining £12,000 of his savings so he can benefit from tax relief on it.
Scenario 2: How to claim pension tax relief on more than £40,000
In certain circumstances it is possible to carry forward any unused Annual Allowance from the previous 3 tax years, to claim tax relief on more than £40,000 of contributions in a single tax year.
For example: Joan earns £90,000 per year. She has been a member of a UK registered pension scheme for some years, but hasn’t made any pension contributions in the last two tax years, and has a savings pot of £64,000. Because her annual earnings are more than £40,000, Joan is entitled to the full £40,000 annual allowance for this tax year, plus her £40,000 allowance from the last tax year, which she hadn’t used. This means Joan can pay her full £64,000 of savings into her pension (£32,000 for each tax year) and she will be eligible for tax relief on the full amount. Her pension provider will then automatically top up Joan’s £64,000 contribution to the full tax relieved £80,000 for the last two tax years combined.
Please be aware, these are simplified scenarios. It is always safest to get professional pension planning advice, and we are here to help.
Note: the maximum Annual Allowance is increasing from £40,000 to £60,000 at the start of the coming 2023/24 tax year, which begins on 6th April 2023. Find out more about this and other changes to pensions in our UK Spring Budget Guide 2023
There is still time to maximise your tax relief!
The tax year ends on 5th April 2023, so now is the perfect time to get in touch. We can talk your through everything we just covered in more detail, and apply it to your specific situation to help you maximise your UK pension tax relief without exceeding HMRC limits. If you are reading this after 5th April 2023, don’t worry. Just schedule some time to discuss how we can make the most of your allowances and make your money work harder for you in future tax years.
Get a clear breakdown of all the recent decisions announced by the Government regarding your pension and more, in our UK Spring Budget Guide 2023
Disclaimer – capital at risk. Investment in a pension is not risk free and consideration should be given to all the investment options available. This blog does not constitute personal advice. Tax rates and reliefs are dependent on your individual circumstances and are subject to change. We recommend that all individuals take independent financial advice before taking any action so that we can provide you with a solution tailored to your specific situation.