Pension tax relief on pension contributions

What is pension tax relief?

Pension tax relief is a bit like a top-up. For most of us, each time we pay into our pension (known as a pension contribution), the government adds money too. It does this through tax relief.

Pension tax relief can be a slightly weird, wonderful and not to mention complex world.

How does pension tax relief work?

‍When it comes to getting tax relief on pension contributions there are a few key things you need to know:

How much money you can put in a pension
How much tax relief you’ll get
How you’ll get the tax relief

How much money can you put in a pension?

The UK government sets limits on how much we can contribute to a pension, and how much tax relief we can get.

They do this because while pension tax relief plays a crucial role in boosting our savings for later life and retirement, it’s an expensive game for the government.

How much you can contribute depends on your annual income, and is called an “annual allowance”.

An annual allowance tells us how much we can each put into our pensions (so that’s both workplace and personal) before we could face a personal tax charge. Your annual allowance will depend on things like how much you earn or if you’ve already started taking benefits from a pension.

We’ve listed all annual allowances below so take a look and see which one is relevant to you.

Low or no income earners

If you earn less than £3,600 or have no earnings you can still contribute to a pension.

The most you can put in your pension and get tax relief on is £2,880 a year (that’s £3,600 after tax relief has been added).

Standard annual allowance

Who does this apply to?

Most people (unless you fit a different annual allowance category below).

What does it mean?

With the standard annual allowance, you can put up to 100% of your annual earnings or £60,000 (whichever is less) each year into a pension.

So if your earnings are £36,000 a year, you can add up to £36,000 into pensions that year, while still getting tax relief and avoiding a tax charge.

Annual allowance for high earners

Who does this apply to?

If you are a high earner, your pension annual allowance may be lower than the standard annual allowance of £60,000. This is known as the tapered annual allowance.

What does it mean?

A high earner is someone who has a ‘threshold income’ of above £200,000 and an ‘adjusted income’ of over £260,000. If you think you might fall into this category, take a look at this page for more info.

If you meet the above criteria then your annual allowance will reduce by £1 for every £2 of adjusted income over £260,000.

For example, if you have a threshold income above £200,000 and your adjusted annual income is £280,000, your annual allowance will be reduced by £10,000 to £50,000.

All tapering stops at £360,000, which means everyone gets an annual allowance of at least £10,000.

Money purchase annual allowance

Who does this apply to?

If you’ve already started taking money from a defined contribution pension pot (this could be a personal or a workplace pension) you’ll have likely triggered the Money Purchase Annual Allowance (MPAA).

You will have been told by your pension provider if you have triggered it.

What does it mean?

If you’ve triggered the MPAA, your annual allowance and the amount you can add into a pension each year will be £10,000 for the 2024/25 tax year.

What happens if you exceed the annual allowance?

If your pension contributions go above the amount allowed by your annual allowance, you could face a personal tax charge.

The charge effectively claws back some of the tax relief your pension plan has received and shouldn’t have.

Any contributions over your annual allowance will be charged at your highest marginal rate of income tax.

How do you pay it?

Most of the time you pay it back to HMRC by declaring any excess contributions (i.e. the amount you’ve paid into a pension that’s above your annual allowance) on your self-assessment tax return.

It may be possible to request that the tax charge be paid out of your pension plan funds if you are eligible under the ‘Scheme Pays’ rules.

How do you avoid the tax charge?

If you have not fully used your available annual allowance from the previous three tax years and, provided you were a member of a registered pension scheme during that period, you may be able to “carry forward” unused annual allowances from these years to get rid of or reduce any tax charges. You do this by including any unused allowances in your self-assessment tax return.

If you think you may be close to, or have already exceeded, your annual allowance and you are in any doubt about its impact, you should seek financial advice as this is a complex area.

How much tax relief you’ll get

How much tax relief you get depends on what rate of income tax you pay.

Most of us in the UK are basic rate taxpayers, we earn less than £50,270, so pay 20% income tax on these earnings. This means any tax relief is also at 20%.

Tax relief example

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Now if you don’t quite fit the above example, don’t worry.

As we saw with the annual allowance for low or no earners, the Government gives basic rate tax relief on all pension contributions up to a certain amount regardless of whether you pay tax or not.

And if you pay more than the basic rate of tax then you’ll be able to claim further tax relief yourself.

Using the same example:

if you pay tax at say 40% you may be able to claim an extra 20% in tax relief. Bringing total tax relief to £40 and meaning that £100 going into your pension plan has only cost you £60.
if you pay tax at say 45% you may be able to claim an extra 25% in tax relief. That brings total tax relief to £45 and means a £100 pension contribution only costs you £55.

Cost of a £100 pension contribution for different taxpayers

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❗ It’s important to remember though, this relief will go into your pocket rather than into your pension account. If you want to make this part of your pension savings, that’s an extra step to put it back into your pension.

‍How to work out pension tax relief

How do we know what extra tax relief we can claim? That’s the million-dollar question. So here’s the million-dollar answer.

How much tax relief you get and whether you can claim any extra depends on the income tax rate the cash you used to top up your pension was taxed at.

So before getting into a few SIPP tax relief examples, it’s worth reminding ourselves what the UK income tax rates are.

SIPP eligibility rules apply. Tax treatment depends on your personal circumstances and current rules may change. Check the UK Government’s Income Tax rates and Personal Allowances, Income Tax in Scotland and Tax on your private pension contributions pages for latest information.

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Basic rate taxpayer example

Let’s say you earn £30,000 a year and want to make a gross pension contribution of £10,000 that year.

You add £8,000 to your SIPP account and you’d get basic rate tax relief (20%) added directly into your SIPP.

“But £2,000 is actually 25% of £8,000”, you might be thinking. That £8,000 you’ve contributed was originally £10,000 before it was taxed (at the 20% tax rate). So you’re getting 20% tax relief on the gross £10,000 you earned, which is equal to £2,000. In effect, you’re getting back the 20% tax you paid - but it’s put directly into your pension.

So the total cost of your £10,000 pension contribution is just £8,000.

You pay	£8,000
Tax relief	£2,000 Automatically added to your SIPP
Total pension contribution	£10,000
Cost to you	£8,000

Higher rate taxpayer example

With earnings of £55,270 a year, you’ll pay both basic rate (20%) and higher rate (40%) income tax on your earnings.

For a pension contribution of £10,000:

You’ll get the basic rate tax relief (20%) added directly to your SIPP account. This is 20% of £10,000 which totals £2,000.
You can also claim an extra 20% tax relief from HMRC on your tax return on the contribution that was taxed at the higher rate (ie. the £5,000 of your income that was taxed at the higher 40% rate). This means you can claim 20% of £5,000 (i.e. £1,000) on your tax return.
Thanks to tax relief, the total cost of your £10,000 pension contribution could be just £7,000.

You pay	£8,000
Tax relief	£2,000 Automatically added to your SIPP
Total pension contribution	£10,000
Additional tax relief	£1,000 You claim on your tax return
Cost to you	£7,000

Additional rate taxpayer

With earnings of £129,140 a year, you’ll pay basic, higher and additional rates of income tax on your earnings.

For your pension contribution of £10,000:

You’ll get the basic rate tax relief added directly to your SIPP account. This is 20% of £10,000 which totals £2,000.
You can claim an extra 25% tax relief from HMRC on your tax return on the pension contribution that was taxed at the additional rate (ie. the £4,000 of your income that was taxed at the 45% additional tax rate). This means you can claim 25% of £4,000 (i.e. £1,200) on your tax return.
You can also claim a further 20% tax relief from HMRC on the contribution that was taxed at the higher rate. This means you can claim a further 20% tax relief on the remaining £6,000 of your £10,000 pension contribution. This is an additional £1,200 to claim on your tax return.

Thanks to tax relief, the total cost of your £10,000 pension contribution could be just £5,800.

You pay	£8,000
Tax relief	£2,000 Automatically added to your SIPP
Total pension contribution	£10,000
Additional tax relief	£2,200 You claim on your tax return
Cost to you	£5,800

A few notes on the above examples:

These examples assume contributions will be paid by the client into a money purchase pension scheme, that the Money Purchase Annual Allowance (MPAA) of £10,000 has not been triggered, and the client's overall tax year contribution does not exceed the annual allowance of £60,000.

It also assumes that the client has the standard Nil rate threshold of £12,570.

Check the UK Government’s Income Tax rates and Personal Allowances, Income Tax in Scotland and Tax on your private pension contributions pages for latest information.

Please remember, tax treatment depends on your individual circumstances and current rules may change..

How do I get my pension tax relief?

The good news is that often you won’t have to do anything to get basic rate (20%) tax relief, it will happen automatically.

There are two main ways to get tax relief: relief at source and net pay.

For a personal pension, the relief at source method is always used.

For a workplace pension, your employer chooses which of these two methods is used.

What is relief at source?

With a personal pension, any payments you make to your pension will be made using your after-tax pay (ie. the wages that end up in your bank account and you’ve already paid tax on). So any tax relief in this scenario will have to be claimed back from the government.

With a SIPP, basic rate tax relief (20%) is automatically claimed and added to your SIPP account after each contribution.

If you have a SIPP account with Freetrade we’ll claim this for you and add it to your SIPP account automatically.

Claiming tax relief if you pay income tax above the basic rate

While basic rate tax relief (20%) is automatic, if you pay tax at a higher rate than this you will likely be able to claim extra tax relief.

You can do this by completing an annual self-assessment tax return and confirming any pension contributions or you can contact your local tax office.

You’ll need to have your end of year pay statement (P60) that shows your earnings and workplace pension contributions for that year and for any personal pension contributions a contribution certificate.

It’s important to remember though, extra tax relief will go into your pocket rather than into your pension account.

If you want to make this part of your pension savings, that’s an extra step to put it back into your pension.

What is the net pay method?

With net pay, your pension contribution is taken from your pay before you’ve paid any income tax and before it’s paid out to you.

This way you get full tax relief at this time and don’t pay any tax on these earnings.

If the deduction of your contributions from your pay takes your annual earnings below the income tax threshold (i.e the first £12,570 of income no one pays income tax on), then you will not get full tax relief through this method.

This should be fixed by HMRC’s annual P800 tax calculation but you may have to make a claim via self-assessment. In these circumstances, it’s best to check with your employer.

The Freetrade Pension

Self-invested personal pensions (SIPPs) are included with the Freetrade Plus plan.

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How you get your tax relief will vary depending on what type of pension it is and who is giving it to you (we’ve covered this above).

With a Freetrade Plus plan you can open and invest in a self-invested personal pension (SIPP) which means that (like all SIPPs) basic rate tax relief is added directly into your pension account by your pension provider.

Let's say you add £80 into your SIPP, we’ll collect the £20 (ie. the 20% tax relief) from the government directly. Making your total pension contribution £100.

It normally takes around 6-11 weeks from the day you contribute for the tax relief to appear in your account.

Carry forward rule

If you haven’t used all of your annual allowances in the last three years, you may still be able to use some of these annual allowances.

This is known as the carry forward rule and it allows you to add more than the annual allowance (currently £60,000) to your pension in a year while avoiding the annual allowance charge.

To use the carry forward rule, you must:

have been a member of a pension scheme in each year you wish to carry forward the annual allowance
have used up your full annual allowance this current tax year
earn at least the amount you wish to contribute to your pension in that tax year
use any unused allowance from the earliest year first
not have triggered the MPAA, you cannot use carry forward to increase the MPAA limit (currently £10,000).
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Pension tax relief FAQs

Will I be eligible for tax relief on my contributions?

To be eligible for tax relief you must be a relevant UK individual.

You can then make a contribution of up to £3,600 each tax year on which you will be eligible for basic rate tax relief.

For contributions above £3,600, you will be eligible for tax relief on contributions of up to 100% of your relevant UK earnings. But tax relief may be clawed back if you exceed an annual allowance.

You are a relevant UK individual if you are under 75 years old and:

have relevant UK earnings that will be subject to income tax that year, or
UK resident, or
were resident in the UK at some time during the five tax years immediately before the tax year in question and were also resident in the UK when you joined the pension plan. In this case, tax relief is limited to a max contribution of £3,600 per tax year.
you or your spouse have, for the tax year in question, have general earnings from overseas Crown employment subject to UK tax
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What are relevant UK Earnings?

As a general rule, most income that is earned and assessable for income tax in the UK counts as relevant UK earnings.

These include:

employment income which includes your salary, wages, bonuses and any commission

income from self-employment or partnership
income from patent rights, where you created (or jointly created) the patented invention
income from your job as an overseas crown employee and you pay UK tax

Please note this isn’t a complete list of relevant earnings. If you are in any doubt as to whether earnings are relevant UK earnings, then you should seek professional advice.

How do I know what type of pension tax relief I qualify for?

For a workplace pension, your employer will choose whether to administer tax relief via relief at source or the net pay method.

For SIPPs and other personal pensions, the relief at source method is used.

UK pension tax relief rates

Income tax bands	Tax rate	Tax relief on pension contributions
Don’t pay income tax Under UK personal allowance of £12,570	0%	20%
Basic rate Earnings of £12,571 to £50,270	20%	20%
Higher rate Earnings of £50,270 to £125,140	40%	40%
Additional rate Earnings over £125,140 a year	45%	45%

Rates subject to change. Check the UK Government’s Income Tax rates and Personal Allowances and Tax on your private pension contributions pages for latest information.

Scottish pension tax relief rates

Scottish income tax bands are different from the rest of the UK. This means when it comes to pension tax relief, Scottish taxpayers have different amounts they can claim.

Income tax bands	Tax rate	Tax relief on pension contributions
Don’t pay income tax Under UK personal allowance of £12,570	0%	20%
Starter rate Earnings of £12,571 to £14,876	19%	20%
Basic rate Earnings of £14,877 to £26,561	20%	20%
Intermediate rate Earnings of £26,562 to £43,662	21%	21%
Higher rate Earnings of £43,663 to £75,000	42%	42%
Advanced rate Earnings of £75,001 - £125,140	45%	45%
Top rate Earnings over £125,140 a year	48%	48%

Rates subject to change. Check the UK Government’s Income Tax in Scotland and Tax on your private pension contributions pages for latest information.‍

How does Freetrade claim tax relief?

Freetrade will claim 'Basic Rate' tax relief from HMRC for you and deposit it in your account automatically.

It normally takes around 6-11 weeks from the day you contribute for the tax relief to appear in your SIPP account.

Who claims tax relief above the basic rate?

If you pay above basic rate income tax, you can claim any additional tax relief you might be owed by submitting a self-assessment tax return and telling HMRC how much you have contributed to a pension.

What is the lifetime allowance?

‍The lifetime allowance was the maximum amount you could save into a pension without needing to pay additional tax. This allowance was set at £1,073,100 until it was abolished on 6 April 2024.

The lifetime allowance has been replaced with three new allowances that act similarly.

The lump sum allowance is the maximum tax-free amount you can withdraw from all your pensions combined. The limit is £268,275 for anyone without lifetime allowance protection.
The lump sum death benefit allowance sets a limit on the tax-free lump sum that can be paid from all your pensions when you pass away. For those without lifetime allowance protection, the limit is £1,073,100.
The overseas transfer allowance sets a limit on the maximum tax-free amount you can transfer out of the UK. The limit is £1,073,100 for those without lifetime allowance protection.

Remember, allowance may vary according to your personal situation, so seek advice if you’re unsure. For the most up-to-date information about taxes on your personal pension see the Government’s website.

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‍Important information

When you invest, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest.

This should not be read as financial advice and individual investors should make their own decisions on what investments are right for them or seek independent advice.

SIPP eligibility rules apply. Tax treatment depends on your personal circumstances and current rules may change. US dividends received into your SIPP may be subject to US withholding tax.

A SIPP is a pension designed for you to save until your retirement and is for people who want to make their own investment decisions. You can normally only draw your pension from age 55 (57 from 2028), except in special circumstances.

At present, Freetrade only supports Uncrystallised Fund Pension Lump Sums (UFPLS) for customers who wish to withdraw funds from their SIPP after their 55th birthday. We strongly encourage you to seek financial advice before making any withdrawals from your SIPP.

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Pension tax relief

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