Tax relief on pensions

Tax relief is potentially available on personal pension payments made by individuals and in many cases the tax relief available is being overlooked.

The relief works by extending an individual’s basic rate tax band by the gross value of the payments made. This can provide a useful tax saving to those paying tax at the higher or additional rates.

The personal allowance and basic rate band have remained at £12,570 and £37,700 for the 2024-25 tax year. So, an individual only needs to earn more than £50,270 in a year before becoming a higher rate taxpayer. With wages increasing this will become of greater relevance to more individuals.

The easiest way to demonstrate how tax relief on pensions works is through an example. Suppose an individual has a salary for the year of £80,000 and no other income sources. This individual is charged £29,730 (£80,000 – £50,270) at the higher rate of 40%.

They make £8,000 of net private pension payments in the same tax year. The gross value of the payment will be £10,000 and the basic rate band for this individual will increase by this total.

A tax saving of £2,000 arises as a result of this. This is because an additional £10,000 of income is being paid at 20% rather than 40%.

If the individual in this example was in receipt of child benefit, the benefit received will no longer be due back in full (which is the case when income is £80,000 or over). Instead, the assessable income in determining the clawback of this benefit will now be £70,000. This means, per the rules introduced for 2024-25, only half of the child benefit received is repayable, instead of the full amount.

Also, the value of these payments reduces an individual’s assessable income in determining if their personal allowance needs to be tapered. The allowance is reduced by £1 for every £2 an individual earns over £100,000.

The above demonstrates how claiming tax relief on pension payments can create substantial savings.

If an employment pension scheme is awarded through salary sacrifice no further tax relief can be claimed. In contrast, if the scheme is not under salary sacrifice, a claim may be made to HMRC for the full tax relief available. It is worth checking with your employer to ensure tax relief on pensions is not being missed.

The tax relief on pension payments are commonly claimed on an individual’s Tax Return. If the individual is not in Self-Assessment, HMRC will need to be advised separately via a government gateway account or by being contacted on the phone.

If a claim has not been made for tax relief on pensions in previous tax years the tax saving available is not necessarily lost. An overpayment relief claim can be made for up to the past four tax years.

Please contact Joe Wilson, Tax Manager and part of our personal tax accountant’s team, if you wish to see if you are entitled to any unclaimed tax relief.