How do I get tax relief on my pension contributions?
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I’ve just had a pay rise and that has made me a higher rate taxpayer, including in the current tax year. I have a personal pension as well as my workplace one and put regular contributions into that. I know I’m entitled to get tax relief on my contributions: how do I get the full higher rate tax back?
Matthew Hinchliffe of Smith & Pinching responds:
You are right that pension contributions attract tax relief, meaning that you will get the tax paid on your contributions added to your fund. For basic rate taxpayers, this normally happens automatically: your pension company will add a further 20pc to the fund.
Higher and additional rate taxpayers are entitled to full tax relief at 40pc and 45pc respectively, but they will only get the basic rate 20pc relief added automatically. You will need to actively claim the additional relief for both your workplace and personal pension via your self-assessment tax return.
You will get the relief in one of three ways: a rebate at the end of the tax year; a reduction in your tax bill; or a change to your tax code.
If you are planning to make particularly high contributions, you should bear in mind two key tax allowances that apply to pensions: the annual allowance and the lifetime allowance.
Tax relief is only available on contributions up to your annual allowance. The standard annual allowance is currently £40,000 but there are a couple of instances where your annual allowance is reduced.
Firstly, if you have started taking flexible benefits from your pension scheme, it will be reduced to just £4,000. This reduced annual allowance is known as the Money Purchase Annual Allowance (MPAA). Secondly, the annual allowance may be reduced if you are a particularly high earner, but as you are a higher rate taxpayer, not an additional rate taxpayer, this is unlikely to apply to you.
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The lifetime allowance (LTA) is the total amount you can hold across all your pension schemes without incurring a further tax charge when you access your benefits, or when you reach age 75. The LTA currently stands at £1,073,100 and has been frozen until April 2026. If your pension savings are heading to anywhere close to this amount, it’s important to do some planning.
I recommend you take independent financial advice to ensure you manage the tax efficiency of your pension savings.
Any opinions expressed in this article do not constitute advice. The value of your investment can go down as well as up and you may get back less than the amount invested. They assume the 2021/22 tax year and may be subject to change.
For more information, please visit www.smith-pinching.co.uk