Tax relief: Understanding your pension’s superpower

Every time you pay into your pension, you get a government boost. This is your pension’s superpower, and what makes it stand out from every other type of savings or investment account. 

Pay in less, get more invested

If you pay basic-rate tax, pension tax relief works like a top-up.

You pay £80, but £100 goes into your pension.

That extra £20 is tax relief from the government. It’s added to your pension and goes towards your retirement. Once it’s in the pot, you can invest it and grow it as though you had put it in there yourself.

And that’s the real superpower. Tax relief is applied each time you contribute AND it can grow over time just like the rest of your pot. So, that extra £20 might end up being a whole lot bigger when you reach retirement age.

Tax relief: Supercharging your pension pot

Tax relief gives you an immediate head start on every contribution. 

The importance of this over the longer term is that you can have more money working for you in the market.

In the basic example above, we see the difference between an £80 total contribution and a £100 contribution, made up of your £80 and the government’s £20 top-up, across 30 years. 

Assuming a 7% annual return, there’s a difference of £23,389 in the end result but the amount you invest is the same. 

This is why using a pension account, such as a Self Invested Personal Pension (SIPP), to save for retirement is so much more efficient than using savings accounts or ISAs where there is no top-up on your contributions.

Put simply, tax relief makes each and every pension contribution a lot more powerful.

What you need to do?

For a personal pension like a SIPP, basic-rate tax relief is generally handled for you.

You contribute to your pension, and Freetrade claims basic-rate tax relief from HMRC on your behalf.

The reclaimed tax relief will not show up in your account immediately, but will generally arrive in 6-11 weeks. 

This leaves you to start contributing, and keep it consistent.

However, you might be entitled to more than just basic-rate relief…

Are you entitled to even more tax relief?

Are you a higher-rate or additional-rate taxpayer? 

If so, you may be able to claim extra tax relief on top of the basic-rate amount. 

That’s 40% total relief for higher rate taxpayers… 

and 45% for additional rate taxpayers.

If you contribute to a SIPP and want to claim this extra tax relief on top of the initial 20% basic-rate, you need to tell HMRC about your pension contributions. You usually need to do this by filing a self assessment tax return.

To find out more details, read Freetrade’s full guide to pension tax relief. 

Get a SIPP, and get tax relief

Freetrade’s SIPP gives you the ability to benefit from pension tax relief, and invest your retirement pot in over 7,000 different stocks, ETFs, funds, and more. 

It’s also free to open, and there are no monthly fees to worry about with a Basic plan. 

Why not open a Freetrade SIPP today?