Pensions: Are you making the most of this valuable tax relief?

Most people know that you can take a tax free lump sum of 25% from your pension when you are ready to retire, but how do you grow your pension pot and make the most of the valuable tax reliefs available?

Understanding Auto Enrolment

Since 6 April 2019, the minimum contribution and employer makes towards their employees’ pension was increased to 8%, with a minimum of 5% contributed by the employee and 3% by the employer.

This means that employers are legally obliged to offer an Auto Enrolment pension to their employees for these minimum pension payments to be made and employees must be automatically enrolled into the scheme if they hit the eligible income threshold, and are between age 22 and state pension age.

An employee can opt out of the scheme if they wish within the opt out period. More information can be found here on pension auto-enrolment.

What tax reliefs are there with making pension contributions?

Individuals can make pension contributions from employment or self employment income.

𝐀𝐧𝐧𝐮𝐚𝐥 𝐀𝐥𝐥𝐨𝐰𝐚𝐧𝐜𝐞

This is the amount that you can contribute to your pension pot in a given tax year, and it is not the amount that you can receive relief on. The annual allowance for most people is £40,000.

If you receive income over £200,000 in a given tax year, known as ‘threshold income’ or you have ‘adjusted income’ over £240,000, then the amount of annual allowance tapers down or reduces.

If you do not use your annual allowance in a given tax year, then you do not lose this valuable tax relief, you can carry it forward to future tax years. You can ‘carry forward’ unused annual allowance from the previous three years, and you always use the earliest year-first.

𝐋𝐢𝐟𝐞𝐭𝐢𝐦𝐞 𝐀𝐥𝐥𝐨𝐰𝐚𝐧𝐜𝐞

This is the total amount that you can build up in your pension pot until retirement age. The lifetime allowance is currently £1,073,100. The good news is that if this threshold changes in the future and say, reduces from this threshold, you can potentially protect the amount already saved in your pension pot.

Be careful: Tax Charges

If your pension contributions or pension pot go above these tax relief limits you may be subject to a tax charge.

If you go above the annual allowance you will need to declare this on your personal tax return. In certain circumstances your pension provider will pay the tax charge from your pension pot.

If you go above the lifetime allowance your pension provider will deduct tax. Again, you will need to report this on your personal tax return.

Important: when looking at the level of contributions you hold in your pension, all pension pots are considered and totalled before looking at the available tax relief and potential tax charges if exceeding thresholds.