Q: Brian – can you explain pension tax in a simple to understand way please, including Personal Allowance, higher rate tax relief, and pension annual allowance?
Income tax and pension tax relief
The amount of pension tax relief you receive is determined by the amount of income tax you pay. In England, Northern Ireland, and Wales there are three different rates at which you pay income tax: basic, higher, additional. Your income tax band is determined by your gross annual earnings, so as you earn more you’ll move up through the bands.
| Band | Tax rate |
| Personal Allowance (Up to £12,570) |
0% |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% |
The income tax bands for Scotland are slightly different, you can learn more about them at Gov.uk.
Remember, you don’t pay Income Tax at the same rate on all your income. You only pay the rate of Income Tax on your income in the bracket.
You’ll pay
- Nothing on your first £12,570 (Personal Allowance)
- 20% on anything after that up to £50,270 (basic rate)
- 40% between £50,271 and £125,140 (higher rate)
- 45% on earnings over £125,140 (additional rate)
What is pension tax relief?
Pension tax relief is essentially free money from the government. Generally, when you contribute to a personal pension, you’ll receive tax relief in the form of a 25% top up. The idea is that you’ll get whatever you paid in income tax back into your pension where it can benefit from potential gains. So, if you pay more than the basic tax rate, you may qualify to receive more in tax relief.
If you pay income tax at a rate of 19% in Scotland, your pension provider will claim pension tax relief for you at 20% and you won’t have to pay the difference.
Let’s look at an example – if you’re a basic rate taxpayer it will cost you £80 to add £100 to your pension. For income taxed at the higher rate, investors will only pay £60 and for income taxed at the additional rate, just £55.
Unlike the basic rate of pension tax relief, you won’t automatically receive pension tax relief on additional and higher tax in your personal pension. Instead, you’ll have to claim it back yourself via a self-assessment return form.
Pension annual allowance
The annual allowance is the most you can save in your pension in a given tax year without having to pay an annual allowance charge. Currently, this amount is £60,000 per tax year.
You can usually get pension tax relief on contributions up to the annual allowance or the equivalent of your total earnings if they are less than £60,000 per tax year.
Q: Hi Brian, I’m wondering how to go about finding all my pensions from age 18. I’m 51 now.
This probably feels like a huge task but it’s actually very simple when you use our in-app Pension Provider Search tool. Find it by heading to Discover > Tools > Scroll down to Pension Provider Search. From here, all you need to do is tell us the name of your previous employer and the dates you worked there to search for your old pots.
Please note some of this information is gathered from a government database and may not reflect current provider information for all employers. We cannot always guarantee the accuracy of your search results where we’ve relied on this service to locate your pensions.
Q: Hi Brian, what kind of pension pot do I need to give me a salary of £40k per year?
This really depends on your personal circumstances – your age, when you want to retire, and how much you currently have saved. You can use our handy Pension Calculator to work this out for your personal situation. But let’s look at an example for a general overview.
Jen is 35, she wants to retire aged 67, and is on track to earn around £40,000 per year at retirement. Here’s how her finances look:
- Salary before tax: £55,000
- Current pension savings: £30,000
- Workplace pension contributions: 13%
- Personal pension contributions: £275
- Projected pension pot at 67: £1,140,000
- Projected annual pension: £40,100 per year until age 95
We use a number of assumptions to calculate how much your savings might be worth at retirement.*
Q: Dear Brian. Some of my colleagues believe that large chunks of salary sacrificed for pension contributions would be better spent now while we are young, fit, and healthy, as opposed to when we are older and perhaps have less mobility and appetite for adventure. What do you make of this theory?
There’s no right or wrong answer here, it depends entirely on your own priorities. There’s no longer a one-size-fits-all retirement plan in which you tools down the day you retire and never look back. Some people plan on working as long as they possibly can, some are saving as much as possible early on in their career so they can retire in their 40s and 50s. Others are considering winding down working hours to part time or less.
As you say, you may feel you could get more enjoyment out of your money now than in retirement. However, it’s still a good idea to start saving something towards retirement from the point at which you enter employment.
Having said that, you could be missing out on potential growth if you don’t save enough early on in your career. One of the things that makes saving for retirement so difficult is something called present bias, which is the tendency to prioritise goals that are closer to the present time. Retirement is so far in the future that we can’t envision our future selves and lives that we’re saving for. But, the time will come and you will need savings to fund your retirement. And the best thing you can do to help your money grow is give it time. The earlier you start to invest into a pension, the less you may need to save overall.
Important to know
*We use a number of assumptions to calculate how much your savings might be worth at retirement.
- Investments across all your pensions are assumed to grow at a rate of 5% each year, with total fees on those pots charged at 0.68% per year.
- We assume your salary increases by 2.5% per year until you reach retirement. Any contributions you make into your pension(s) are also assumed to increase in line with your salary.
- Projected annual pension includes the State Pension in your projections, this will add the equivalent of £11,502.20 to your income when you reach State Pension, which we assume is age 67.
- All contributions you make into your Moneybox Personal Pension and workplace pension are eligible for tax relief from the government.
- We have not taken into account the effect of inflation in your projected retirement savings. However, we have adjusted your retirement income for inflation.
- Your total workplace contribution percentage applies to your full annual salary and includes contributions made by both you and your employer.
When deciding whether to transfer your pension, it’s important to compare the charges, investment options & benefits between Moneybox and your old provider. Moneybox cannot accept a transfer from a pension your employer is currently paying into.
As with all investing, your capital is at riskThe potential for loss. Usually, but not always, higher risk assets can have the potential for higher returns.. The value of your pension can go up and down, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future.
If you’re not sure whether the Moneybox Pension is right for you, you may want to contact a suitably qualified financial adviser for help.
By consolidating your pensions, you may miss out on potential ‘small pot’ pension benefits such as not triggering the Money Purchase Annual Allowance on withdrawal
