Tax Efficient
The money you save into your pension comes from your salary. There are different ways to make your contributions and they impact the tax savings you make. Your pension will either work on a:
- non-salary sacrifice basis - where your contributions are taken before you pay tax, or
- salary sacrifice basis - where you sacrifice salary for pension contributions.
If you’re unsure which way you make your contributions, you can check with your employer.
Your contributions are taken from your pay before tax, so the money you'd normally pay as income tax automatically goes into your pension pot instead, as you can see below for a 20% rate taxpayer. If you pay tax at a higher rate, your tax savings will be higher.
If you don't pay tax, you won't have been benefiting from tax savings on your pension contributions up to 5 April 2024. The Government has introduced arrangements for individuals who are not paying tax on their earnings to claim tax relief on their employee contributions to the scheme. This applies to contributions paid from 6 April 2024 onwards. You will need to contact HMRC to arrange this tax rebate. Claims will be processed in the tax year following the year claimed, i.e. claims for the current tax year would be processed by HMRC in the next tax year.
Salary sacrifice means you exchange salary for pension benefits. As your salary is reduced you normally pay less tax and National Insurance (NI). The salary you exchange, and the tax and NI saving you make, go straight into your pension pot as you can see below for a 20% rate taxpayer paying 8% NI.
If you don't pay tax, you won't benefit from tax savings on your pension contributions. The Government has introduced arrangements for individuals who are not paying tax on their earnings to claim tax relief on their employee contributions to the scheme. This applies to employee contributions paid by you to the scheme from 6 April 2024 onwards, but does not apply in respect of salary you are exchanging for an employer contribution to your pension. As a result, if you not paying any tax and are exchanging salary for an employer contribution to the scheme you will not have tax relief on the salary exchanged.
If you exchange salary for pension contributions, it could affect any future state or salary-related benefits or entitlements. Please speak to your employer about how this may affect you.
Income tax on pension savings
The total amount of tax relief you get on your pension savings is limited so make sure you're aware of the 'Important information about pensions allowances'. The UK Government may change these allowances from time to time so check their website to see any changes which may impact you. If you think you might be affected, you can get more information from the HM Revenue & Customs website.
If you're a member of a salary sacrifice arrangement, please speak to your employer about how this may affect you.
Tax savings will depend on your individual circumstances and rules can also change.
Your rate of income tax
As your contributions, including any paid by salary sacrifice, are deducted from your earnings before your tax bill is worked out, the amount of income tax you pay will be based on what's left.
If you're a Scottish taxpayer, you'll pay tax based on the Scottish rate of income tax and tax bands. For more information on Scottish income tax, visit www.gov.uk/scottish-rate-income-tax.
If you're a Welsh taxpayer, you'll pay tax based on the Welsh rate of income tax and tax bands. For more information on Welsh income tax, visit www.gov.uk/welsh-income-tax.
More information
Your contributions
One of the benefits of your pension scheme is that your contributions are flexible. You can contribute as much as you like into your pension, although the total amount of tax relief you get on your pension savings is limited.
Auto-enrolment
Auto-enrolment is a UK Government initiative aimed at helping more people save for the future through a workplace pension.
Investment choices
As your pension is an investment, the value can go down as well as up and you might get back less than you put in.
Your pension
During your working life, it's important to consider your retirement and the ability to enjoy life when you reach retirement. Saving into your workplace pension could help you do just that.
Taking your money
Life isn't always as simple as we'd like it to be. Some things take us by surprise and those surprises can cost money.
"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.