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Tax relief on contributions
When you contribute to a pension, you benefit from tax relief on pension contributions. This means part of your tax goes into your pension pot, reducing your taxable income and helping you save more efficiently. This can help reduce your overall tax liability and, over time, could substantially boost your retirement pot. In other words – it costs you less to save more. Although remember, because your pension’s invested, it’s value can go down as well as up, so you could get back less than you paid in.
Different types of pension have their own tax rules. For instance, workplace pensions typically involve employer contributions on top of your own. You might even be entitled to government contributions, depending on the plan you have.
You can choose to increase how much you’re paying in, and some employers may even match this up to a certain amount. This reduces your taxable income and National Insurance contributions, saving you money while increasing your pension pot.
What is the annual allowance for pensions?
The annual allowance is the maximum amount you can contribute to your pension each year while still receiving tax relief. Anything paid in over the annual allowance won’t benefit from tax relief, and you may even receive a tax charge. Currently, the annual allowance is £60,000, or 100% of your earnings – whichever is lower. If you’re a high earner, you even might be subject to a lower annual allowance.
If you haven’t used your full annual allowance in previous years, you may be able to carry forward unused amounts from the past three tax years, provided you were a member of a registered pension scheme during that time.
Find out more about the annual allowance by visiting the MoneyHelper website.
Money purchase annual allowance (MPAA)
As soon as you access your savings from a defined contribution pension, you may trigger the MPAA. From that moment, you’d be limited to contributing £10,000 each year. Anything above that, you won’t receive tax relief on, and you may be subject to a tax charge.
Unlike the annual allowance, you can’t carry forward any unused MPAA from previous tax years. This means that if you don’t use your full MPAA in a given tax year, you’ll lose it.
There are some circumstances where the MPAA won’t be triggered. You’re usually entitled to taking 25% of your pension pot as a tax free lump sum. If you take this, but leave the rest of your pension untouched, the MPAA won’t apply. And if you have pensions worth under £10,000, you can take up three in your lifetime as a lump sum, without affecting your allowance. There are a few other circumstances which won’t be affected by the MPAA either – such as if you buy a guaranteed income (pension annuity), or have a defined benefit pension.
Find out more about the MPAA, and what exclusions apply, by visiting the MoneyHelper website.
Tax on pension income
When you begin drawing an income from your pension, the amount you receive may be subject to income tax. This depends on your total taxable income for the year. Your pension income will be lumped together with other forms of income you may receive, and taxed accordingly based on the total amount. Other forms of income which count towards this include those from:
- the State Pension
- a workplace or personal pension (although 25% can usually be taken as a tax-free lump sum, or in smaller portions)
- employment
- any taxable state benefits
- property
Most people have a personal allowance of £12,570, but this can vary depending on your personal circumstances. Anything you receive above this will be taxed at your usual rate.
For England, Wales, and Northern Ireland:
Tax band |
Income range |
Tax rate |
|---|---|---|
Basic rate |
£12,571 – £50,270 |
20% |
Higher rate |
£50,271 – £125,140 |
40% |
Additional rate |
Over £125,140 |
45% |
For Scotland:
Tax band |
Income range |
Tax rate |
|---|---|---|
Starter rate |
£12,571 – £16,537 |
19% |
Basic rate |
£16,538 – £29,526 |
20% |
Intermediate rate |
£29,528 – £43,662 |
21% |
Higher rate |
£43,663 – £75,000 |
42% |
| Advanced rate | £75,001 – £125,140 | 45% |
Top rate |
Over £125,140 |
48% |
For a more detailed breakdown of tax allowances and their impact on your savings, investments and pensions please visit our tax hub.
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Need help?
Tax can be complicated at the best of times. But with expert help, it doesn’t have to be. Financial advice can help you get to the bottom of what tax means for you, given your needs and individual circumstances.
What this looks like will vary from person to person – everyone’s affected by tax differently, and there’s no one-size-fits-all solution. This can be especially beneficial when trying to structure a tax-efficient income in retirement – as there’s steps you could take to potentially lower your tax bill.
Getting things right could save you money, stress, and time.
