What is pension tax relief?


Imagine that someone offered you free money with no strings attached. You’d be silly to turn it down! This is how pension tax relief works. You contribute a set amount to your pension and, to encourage you to save, the government tops up your nest egg with the same amount you would have paid in tax on your earnings.

How much free money the government will give you depends on how much you earn, how much tax you pay and how much you have contributed to your pension in the past three years.

There is a cap on it, though. If you’re paying income tax, in this tax year – you can usually only get pension tax relief on contributions up to £40,000 (annual allowance) or your earnings if that is less than £40,000.


How does pension tax relief work?

If you’re a basic rate UK taxpayer you’re entitled to tax relief on your pension contributions, which you can also think of as a 25% top-up on your contributions. That means if you contributed £4,800 to your pension pot, the government will give you a top-up of £1,200, bringing your total contribution to £6,000.

Higher rate taxpayers are eligible for 40% tax relief on their pension contributions. So, if you pay tax at this higher rate you would only have to contribute £3,600 to make an investment of £6,000 because you would receive £2,400 in tax relief. 

Additional rate taxpayers earn 45% pension tax relief. So, again, if you are an additional rate taxpayer, to get an investment of £6,000 you would only have to contribute £3,300 into your pension, thanks to the government top-up of £2,700.

Here’s a simple breakdown of how much you would have to pay to invest £100 into a pension…

If you transfer into a Moneybox Personal Pension we can claim basic rate tax relief for you. If you’re a higher or additional rate taxpayer, you’ll have to complete an HM Revenue and Customs (HMRC) Self Assessment tax return to claim back the rest.


How does Scottish tax relief differ?

In Scotland, pension tax relief is applied in a slightly alternative way due to the different income tax bands. Everyone is entitled to the 20% rate of tax relief, including those on the Scottish starter rate of 19%. For Scottish taxpayers on the intermediate, higher or top tax rates, the additional tax relief can usually be claimed via your Self Assessment tax return, or by contacting HMRC if you don’t fill in a tax return.


What about unused pension tax relief allowances?

If you haven’t used your full pension tax relief allowance from a previous year, you can carry it forward to the next. In fact, even better than that, you can still make use of unused pension tax relief allowances from up to three previous years – just as long as you had a pension during that time.


What if I want to contribute more than the annual allowance?

You may contribute over the annual allowance of £40,000, however, this money won’t attract tax relief and will be taxed at the Income Tax rate that applies to you. 


What happens to my pension tax relief if I’m on a small income?

You can still pay into a pension scheme if you wish to and benefit from 20% tax relief. If you earn less than £3,600 a year, the most you can pay into a pension is currently £2,880. Tax relief of £720 would then bring this figure up to £3,600.


What happens to my pension tax relief if I’m on a high income?

If you have an income of over £110,000 and your ‘adjusted income’ (including pension contributions) is over £150,000, the Annual Allowance is reduced, known as Tapered Annual Allowance


What happens to tax relief when you start to draw down your pension?

If you have a defined contribution pension and begin to draw on it, this can reduce your annual contribution allowance down to £4,000 (for the tax year 2019-20) and is known as the Money Purchase Annual Allowance or MPAA. 

The MPAA applies based on how you access your pension pot and there can be some complicated rules around this. Find out more from Money Advice Service


Whatever your financial situation, it’s worth ensuring that your pension is benefiting from these government top-ups that you are fully entitled to.


Please remember, tax treatment depends on your individual circumstances and may be subject to change in the future.

If transferring your pensions, you should consider the charges and benefits before transferring to Moneybox, and whether the risk and reward profile of the investments offered matches your needs.

Please note Moneybox cannot accept a transfer from a pension your employer is currently paying into or a pension with guaranteed benefits. Remember, you can’t withdraw from your pension until you reach the minimum pension age (currently 55).

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest.