Business Helpsheets
Back to HelpsheetsTax on your private pension contributions
1. Overview
Contributions to private pensions can be made free up to certain limits.
This applies to most private pension schemes, including:
- Workplace pensions
- Personal and stakeholder pensions
- Overseas pension schemes that qualify for UK tax relief - ask your provider if it's a 'recognised overseas pension scheme'
You may have to pay tax when you take money out of a pension.
Limits to your tax-free contributions
You usually pay tax if savings in your pension pots go above:
- 100% of your earnings in a year - this is the limit on tax relief you get
- £40,000 a year - check your 'annual allowance'
- £1,073,100 in your lifetime - this is the lifetime allowance
You also pay tax on contributions if your pension provider:
- Isn't registered for tax relief with HM Revenue and Customs (HMRC)
- Doesn't invest your pension pot according to HMRC's rules
2. Tax relief
You can get tax relief on private pension contributions worth up to 100% of your annual earnings.
You get the tax relief automatically if your:
- Employer takes workplace pension contributions out of your pay before deducting Income Tax
- Pension provider claims tax relief for you at a rate of 20% and adds it to your pension pot ('relief at source')
If your rate of income tax in Scotland is 19% your pension provider will claim tax relief for you at a rate of 20%. You do not need to pay the difference.
You get relief at source in all personal and stakeholder pensions, and some workplace pensions.
It's up to you to make sure the tax relief you get isn't worth more than 100% of your annual earnings - HM Revenue and Customs (HMRC) can ask you to pay back anything over this limit.
When you have to claim tax relief
You may be able to claim tax relief on pension contributions if:
- You pay Income Tax at a rate above 20% and your pension provider claims the first 20% for you ('relief at source')
- Your pension scheme isn't set up for automatic tax relief
- Someone else pays into your pension
If you pay 40% Income Tax
Claim tax relief on the extra 20% in your Self-Assessment tax return if you pay Income Tax at the 40% rate. If you don't fill in a tax return, call or write to HMRC.
If you pay 45% Income Tax
You can only claim tax relief on the extra 25% in your Self Assessment tax return if you pay Income Tax at the 45% rate.
If your pension scheme isn't set up for automatic tax relief
Claim tax relief in your Self-Assessment tax return if your pension scheme isn't set up for automatic tax relief.
Call or write to HMRC if you don't fill in a tax return.
You can't claim tax relief if your pension provider isn't registered with HMRC.
If someone else pays into your pension
When someone else (e.g. your partner) pays into your pension, you automatically get tax relief at 20% if your pension provider claims it for you (relief at source).
If you're in a workplace pension that allows other people to contribute you may need to claim the tax relief on those contributions - call or write to HMRC.
If you don't pay Income Tax
You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:
- You don't pay Income Tax, e.g. because you're on a low income
- Your pension provider claims tax relief for you at a rate of 20% (relief at source)
This means that you can invest £3,600 in a pension scheme a year, and it will only cost you £2,880.
3. Annual allowance
You usually pay tax if savings in your pension pots go above the annual allowance. This is currently £40,000 a year, but may be subject to tapering.
Carrying over unused allowance from previous years
You can usually top up your allowance for the current tax year (6 April to 5 April) with any allowance you didn't use from the previous 3 tax years.
Lower allowance if you take money from a pension pot
Sometimes it's possible to keep paying in after you take money out of a pension pot - but you may have to pay tax on contributions over £4,000 a year.
That's because your annual allowance drops to £4,000 for all defined contribution schemes you're in. It drops in the first full tax year after you take money from your pension pot.
The lower allowance is sometimes called the 'money purchase annual allowance'. You can't top it up with unused allowance from previous years.
Kinds of withdrawal that make your annual allowance drop
Your annual allowance drops when you take any of the following from a defined contribution scheme:
- Cash or a short-term annuity from a flexi-access drawdown fund
- Cash from a pension pot ('uncrystallised funds pension lump sums')
- More than the limit from a capped drawdown fund
It also drops to £4,000 in some other situations - your pension provider sends you a 'flexible access statement' to tell you when this happens.
If your allowance drops to £4,000 for one of your pension pots, you must tell other pension schemes you're in within 13 weeks.
If you go over the lower allowance
Your annual allowance also drops to £36,000 for all defined benefit pension pots you're in. You can usually top this up with unused allowance from the previous 3 tax years.
Reduced allowance for high incomes
From April 2016, your annual allowance is gradually reduced (‘tapered’) if both the following apply:
- your ‘threshold income’ is over £200,000 (£110,000 prior to 6 April 2020) – broadly, this is your income excluding any pension contributions (unless they’re paid as a ‘salary sacrifice’ by your employer)
- your ‘adjusted income’ is over £240,000 (£150,000 prior to 6 April 2020) – broadly, this is your income added to any pension contributions you or your employer make
Check how much annual allowance you've used
You need your pension statements to work out how much annual allowance you've used in a tax year - ask your pension provider for statements if you don't get them automatically.
- Check statements for 'pension input periods' that ended during the tax year.
- Work out how much annual allowance you used in those pension input periods - what counts towards your allowance depends on the type of pension scheme you're in.
Do this for all pension schemes you belong to - the total from all schemes is how much annual allowance you've used.
Pension input periods (the period over which you measure your pension savings) now run for a year, between 6 April and 5 April.
| Type of pension scheme | What counts towards the annual allowance |
|---|---|
| Defined contribution pension schemes - personal, stakeholder and most workplace schemes | Total amount of contributions paid in by you or anyone else (including your employer and the government) |
| Defined benefit schemes - some workplace schemes | Any increase in the amount your pension provider promises to give you when you retire |
| Hybrid pension schemes | The higher amount out of total contributions and any increase in the amount your pension provider promises to give you when you retire |
Pay tax if you go above the annual allowance
You'll get a statement from your pension provider telling you if you go above the annual allowance.
If you're in more than one pension scheme, ask each pension provider for statements so you can work out how much you've gone above the allowance.
Use this information to fill in a Self-Assessment tax return. Fill in the 'Pension savings tax charges' section - you'll need form SA101 if you're using paper forms.
HM Revenue and Customs (HMRC) use your Self-Assessment tax return to work out how much income tax you pay.
You can still claim tax relief for pension contributions on your Self-Assessment tax return if you're above the annual allowance.
HMRC don't tax anyone for going over their annual allowance in a tax year if they:
- Retired and took all their pension pots because of serious ill health
- Died
If the tax is more than £2,000
You can ask your pension provider to pay HMRC out of your pension pot if you've gone over your annual allowance and the tax is more than £2,000.
You must tell your pension provider before 31 July if you want them to pay the tax for the previous tax year. You'll still need to fill in a Self-Assessment tax return.
If you're paying tax because you went over the lower allowance of £4,000, your provider can only pay it from your pot if you would have paid more than £2,000 tax based on the full annual allowance of £40,000 (plus unused allowance from the previous 3 tax years).
Rates
The amount you went above the annual allowance is added to your taxable income. You pay income tax on taxable income at the tax rate that applies to you.
4. Lifetime allowance (LTA)
Up until April 2024, you usually paid tax if your pension pots are worth more than the lifetime allowance. The figure stood at £1,073,100 until 2023/24.
However, as announced at Spring Budget 2023 the government abolished the LTA from April 2024, replacing it with new rules.
These include three separate allowances:
- The lump sum – which stood at £268,275 as of April 2024
- The lump sum and death benefit allowance - which stood at £1,073,100 as of April 2024
- the overseas transfer allowance - which stood at £1,073,100 as of April 2024
Check how much of your allowances you've used
Ask your pension provider how much of your allowances you've used.
If you're in more than one pension scheme, you must add up what you've used in all pension schemes you belong to.
What counts towards your allowance depends on the type of pension pot you get.
| Type of pension pot | What counts towards your lifetime allowance |
|---|---|
| Defined contribution - personal, stakeholder and most workplace schemes | Money in pension pots that goes towards paying you, however you decide to take the money |
| Defined benefit - some workplace schemes | Usually 20 times the pension you get in the first year plus your lump sum - check with your pension provider |
Your pension provider may ask for information about other pension schemes you're in so they can check if you're above your lifetime allowance when you:
- Decide to take money from a pension pot
- Turn 75
- Transfer your pension overseas
Pay tax if you go above your lifetime allowance
You'll get a statement from your pension provider telling you how much tax you owe if you go above your allowance. Your pension provider will deduct the tax before you start getting your pension.
You still need to report the tax deducted by filling in a Self-Assessment tax return - you'll need form SA101 if you're using paper forms. You'll get information from your pension provider to help you do this.
If you die before taking your pension HMRC bill the person who inherits your pension for the tax.
Rates
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is:
- 55% if you get it as a lump sum
- 25% if you get it any other way, e.g. pension payments or cash withdrawals
Withdrawing cash from a pension pot
You can’t withdraw cash from a defined contribution pension pot (‘uncrystallised funds pension lump sums’) if you have:
- primary or enhanced protection covering a lump sum worth more than £375,000
- ‘lifetime allowance enhancement factor’ if your unused lifetime allowance is less than 25% of the cash you want to withdraw
Reporting changes to HMRC
You can lose enhanced protection or any type of fixed protection if:
- you make new savings in a pension scheme
- you are enrolled in a new workplace pension scheme
- you transfer money between pension schemes in a way that doesn’t meet the transfer rules
- you’ve got enhanced protection and, when you take your pension benefits, their value has increased more than the amount allowed in the enhanced protection tax rules - this is called ‘relevant benefit accrual’
- you’ve got fixed protection and the value of your pension pot in any tax year grows at a higher rate than is allowed by the tax rules - this is called ‘benefit accrual’
You can report changes online or by post.
Ask your employer whether they’re likely to enrol you in a workplace pension. To make sure you don’t lose protection, you can either:
- opt out of most schemes within a month
- ask not to be enrolled in some schemes - your employer may need evidence of your lifetime allowance protection
Tell HMRC if you think you might have lost your protection.
If you have the right to take your pension before 50
You may have a reduced lifetime allowance if you have the right to take your pension before you're 50 under a pension scheme you joined before 2006.
This only applies to people in certain jobs (e.g. professional sports, dance and modelling) who start taking their pension before they're 55.
Your lifetime allowance isn't reduced if you're in a pension scheme for uniformed services, e.g. the armed forces, police and fire services.
How we can help you
For further assistance please contact us.