Private pensions can receive tax-free contributions, which applies to most pension schemes.
Workplace, personal and stakeholder pensions can all receive these type of contributions. There are limits on how much can be contributed however.
Tax is usually paid on pension pots that go above 100 percent of a persons earnings in a year, £40,000 a year (known as the annual allowance) or £1,055,000 in a lifetime (known as the lifetime allowance).
Tax will also be due on any contributions to pension providers that are not registered for tax relief with HMRC or do not invest the pension pot in accordance with HMRC’s rules.
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The actual amount of tax relief available will depend on the individuals income tax rate.
It is possible to receive tax relief on contributions worth up to 100 percent of annual earnings, beyond this however it is up to the individual to make sure they are not getting tax relief beyond the 100 percent level.
HMRC can ask people to pay back anything that goes beyond this limit.
Tax relief will be given automatically if the persons employer takes workplace pension contributions out of the pay before deducting Income Tax or if the individual’s income tax rate is 20 percent, than the pension provider will claim it as tax relief and add it to the pension pot, which is known as “relief at source”.
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The whole system works on a “top-up” model. To illustrate, take a basic rate taxpayer who contributes £100 of their salary into their pension.
This action would actually only cost the individual £80. The government would add an extra £20 on top of this, which is what it would have taken in tax from the £100.
Basic rate taxpayers can get 20 percent pension tax relief, higher rate payers can claim 40 percent and additional rate payers can claim 45 percent relief.
The key thing to remember is that while the 20 percent pension tax relief occurs automatically, the higher rates will most likely need to be claimed. For higher and additional rate tax payers who are contributing to stakeholder pension schemes, group personal pension schemes or personal pension schemes action will need to be taken to ensure they get their entitled relief.
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The current income tax rates are as follows:
Basic rate: £12,501 – £50,000Higher rate: £50,001 – £150,000Additional rate: over £150,000
The extra tax relief will need to be claimed directly from the government, it will not be automatically given.
In order to claim this relief, a self assessment or tax return form will need to be completed.
To complete this process the person will need to register for self assessment on the government website.
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HMRC will provide the claimant with a “unique taxpayer reference” and they will then receive a letter in April each year to remind them to complete the return.
When claiming for the relief certain details will be needed. The person will need to detail how much they have contributed to their personal pensions as well as details on how much tax relief they have already received.
It is possible to claim the relief over the phone or through a written letter.
However, if this option is taken a lot more information will be needed.
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The claimant will need to provide their name, address, NI number, tax office details and a gross annual pension contribution figure.
So long as all the details are correct, HMRC should issue the tax relief. This will come as either a rebate at the end of the tax year, a reduction in the claimants personal tax liability or a change to their tax code.
It is possible to receive pension tax relief even if the person is a non-taxpayer. An obvious example could be parents who aren’t in employment as they’re raising children full time. These people can still receive tax relief of 20 percent even though they are not paying tax.
Tax relief for people who do not pay income tax get 20 percent relief on the first £2,880 they pay into a pension during a tax year.