Tax relief on contributions

• Individual Pension Plans

• Basic Rate Taxpayer

• Higher Rate Taxpayer

• Additional rate taxpayers

• Non-Taxpayers

• Contributing for someone else

• Company or Occupational Pension Plans

 

1. Individual Pension Plans

 

Tax relief is granted based on the pension planholder’s tax status.

The following summarises how tax relief works for the 2011/12 tax year.

 

Basic Rate Taxpayers

If you pay basic rate income tax (20% in 2011/12), for each pound you contribute to your scheme, your pension provider claims tax back from the government at the basic rate of 20%. In practice, this means that for every £80 you pay, you end up with £100 in your pension fund.

 

Higher Rate Taxpayers

If you pay higher rate income tax (40% in 2011/12), you can claim further tax relief for any money you put into your pension. However, the way that you achieve this relief is different.

 

Your pension provider will claim 20% back from the Government in the same way as for a basic rate taxpayer. So, you would also end up with £100 in your pension fund for every £80 you pay.

 

You can then claim back the balance of your tax relief when you fill in your annual self assessment tax return. This means you will gain the additional relief as a tax offset or a rebate. So, you would end up with £100 in your pension fund and a £20 refund from the Government after submitting your tax return for every £80 you pay.

 

Additional rate taxpayers

 

If you pay additional rate income tax (50% in 2011/12), you can claim further tax relief for any money you put into your pension. However, the way that you achieve this relief is different.

Your pension provider will claim 20% back from the Government in the same way as for a basic rate taxpayer. So, you would also end up with £100 in your pension fund for every £80 you pay.

You can then claim back the balance of your tax relief when you fill in your annual self assessment tax return. This means you will gain the additional relief as a tax offset or a rebate. So, you would end up with £100 in your pension fund and a £30 refund from the Government after submitting your tax return for every £80 you pay.

 

Non-Taxpayers

If you do not pay tax, you are still entitled to receive basic rate tax relief, making a pension a superb opportunity to gain something for nothing. This provision is ideal for housewives, students or even children where the contributions are made on their behalf. So, just like basic rate taxpayers, for every £80 you pay, you end up with £100 in your pension fund – although the maximum you can pay in is £2,880 net pa, which is equivalent to £3,600 grossed up.

Contributing for someone else

You can contribute up to £2,880 net pa (£3,600 gross) into a pension for another person.
If you chose to do this, – for example, for your partner, child or grandchild – they will get basic rate tax relief added, but this will not affect your own contributions or allowances. Where the contributor is a higher or additional rate taxpayer, it is not possible for them to claim the balance of tax relief via their self assessment tax return.

The planholder may claim additional relief through self assessment only if they not the contributor are a higher or additional rate taxpayer.

For example, a higher rate (40%) taxpayer contributes £800 into his wife’s pension fund. She is a housewife and non-taxpayer. Her pension fund will receive a further £200 (20% basic rate tax relief) from the government. However, no other tax relief may be claimed as the planholder is not a higher rate taxpayer.

2. Company or Occupational Pension Plans

 

Company pension schemes usually require you to make a regular contribution based on a percentage of your salary. You may also be able to boost your benefits by making additional voluntary contributions (AVCs).
You receive ‘direct’ tax relief on the money you pay into a company pension, as your employer takes the pension contributions from your pay before deducting tax (but not National Insurance Contributions) and pays the gross sum into your pension scheme or fund. This means that, whether you are a basic rate taxpayer (20%) or a higher rate taxpayer (40%), tax relief is gained immediately.

 

 

 

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