Pension Tax Relief can be a valuable boost to your retirement savings, so it’s important to make sure you’re not missing out.

What is Pension Tax Relief?

Pension tax relief involves the government re-routing some of the money you would have been due to pay in income tax into your pension fund. These contributions are in addition to the contributions made by you and your employer.

In Scotland, a saver earning £23,000 and paying the basic rate of 20% income tax could therefore add £100 to their pension saving by contributing £80 and having the government contribute the £20 which it gathered in income tax. A higher earner paying the 42% rate of income tax could add the same £100 to their pension fund at a cost of £58, receiving the additional 42% from pension tax relief.

For most taxpayers, pension tax relief is applied automatically, however if you pay more than the lowest income tax bands, you may need to take additional steps to ensure you receive your full entitlement; this can be done by claiming this through a self-assessment tax return or by contacting HMRC.

How Much Pension Tax Relief Can I Claim?

Pension tax relief is available on up to £60,000 of contributions each year, or up to 100% of your earnings (whichever is lower), known as your Annual Allowance. The Annual Allowance is tapered for very high earners and can go as low as £10,000, and is replaced by a Money Purchase Annual Allowance of £10,000 for those already accessing pension income flexibly. These allowances are per individual saver, not per pension, and cover all contributions made by you, your employer and the pension tax relief itself. Unused allowances can be carried forward for up to three years as long as you were a member of a pension in those years.

Pension tax relief is connected to your income tax rate. This means that in Scotland in the tax year 2023/24:

• Those earning £12,571 – £14,732 will pay the starter rate of income tax at 19% and earn 20% pension tax relief.
• Those earning £14,733 – £25,688 will pay the basic rate of income tax at 20% and earn 20% pension tax relief.
• Those earning £25,689 – £43,662 will pay the intermediate rate of income tax at 21% and earn 21% pension tax relief.
• Those earning £43,663 – £125,140 will pay the higher rate of income tax at 42% and earn 42% pension tax relief. In addition, for earnings between £100,000 and £125,140 an individual loses their personal allowance at a rate of £1 for every £2 over the £100,000 threshold. Therefore, the “effective tax rate” in this band of earnings is 62% and there can be 62% “net tax saving” in respect of contributions relating to earnings in this bracket.
• Those earning over £125,140 will pay the top rate of income tax at 47% and earn 47% pension tax relief.

You can still claim pension tax relief even if you’re not working, on contributions up to the value of £2,880 each year. With pension tax relief, a contribution of £2,880 will result in £3,600 being added to your pension.

How Do I Claim Pension Tax Relief?

If you are entitled to more than 20% pension tax relief, you may need to complete a tax return or contact HMRC to receive more than the automatic 20%. Some workplace and private pensions – known as ‘net pay arrangements’ – may claim your full entitlement on your behalf, whereas others – known as ‘relief at source’ – do not, and this will dictate the steps you need to take.  

We recommend working with an independent financial adviser to check your entitlement, your current pension arrangements and help you prepare any necessary claims. Why not get in touch for a chat with a member of our team today to find out more about your options?