How your pension gets a boost
One of the biggest advantages of a pension is the tax relief on the money you pay in. This provides an instant boost to your pension savings and helps the fund to grow faster than other kinds of investment.
What is pension tax relief?
To encourage saving for retirement, the government pays tax relief on pension contributions. This means that your pension provider can claim tax back from HMRC and add that amount to each contribution you make. From your point of view, it’s like receiving a bonus on everything you save.
How much tax relief can I get?
You’ll receive tax relief at the highest rate of income tax that you pay. If you’re a basic rate taxpayer, you’ll get 20 per cent tax relief (so every pound you pay in becomes £1.25). If you’re a higher-rate taxpayer, you’ll get 40 per cent (so every pound becomes around £1.66). Additional rate taxpayers get 45 per cent tax relief.
What if I don’t have an income at the moment?
If you’re not currently working, or earning below £3,600, you can still contribute to a pension and get tax relief. However, you’ll only receive tax relief on contributions up to £3,600. You can pay in more if you wish, but this additional amount will not receive tax relief.
Why is pension tax relief so important?
Tax relief on pension contributions is a real help when it comes to saving for retirement. Quite simply, the more you pay in (and the more your employer pays in) the more you receive back from the government.
If your income is only just high enough to be taxed at a higher rate, you may be in a very strong position for pension saving. This is because most of your income will still be taxed at 20 per cent, but you are entitled to tax relief at 40 per cent.
Whatever your situation, talk to a financial adviser to make sure you’re benefitting as much as possible from pension tax relief.
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