Pensions – have you claimed full tax relief?

Today, Karen Oliver, Tax Manager at Plus Accounting aims to shed some light on pensions and tax relief

According to figures provided by Prudential just over a quarter of higher rate taxpayers (those currently earning over £41,865 pa) have not claimed the higher rate tax relief to which they are entitled on pension contributions. The average higher rate taxpayer is missing out on tax relief worth £1,255 per year and it is only possible to make a claim for backdated tax relief for the last four years; after that any tax relief is lost forever.

Do you know how much a pension contribution will actually cost you?

If a 40% taxpayer makes a pension contribution of £10,000 the taxman will add tax relief of £2,500 to that, making the contribution worth £12,500 to the pension fund. Further higher rate tax relief of £2,500 can be claimed either via Self-Assessment or by an allowance in your PAYE code. This means that your annual tax bill is reduced by £2,500, so that it has actually only cost £7,500 to contribute £12,500 to a pension fund.

For taxpayers with incomes in excess of £100,000 or those who pay tax at the additional rate of 45% the tax relief may be higher.

If a basic rate taxpayer makes a pension contribution of £10,000 then the taxman will still add tax relief of £2,500, making the contribution worth £12,500 in the pension fund. There is however no extra tax relief available and so no reduction to your annual tax bill. In this situation it will cost £10,000 to contribute £12,500 to a pension fund.

Is there a maximum amount that can be paid each year?

Currently the maximum annual limit is £40,000 (or the amount of your earnings if they are lower than £40,000). It is possible to increase the amount payable by utilising any unused relief from previous years and a careful assessment needs to be made in order to establish the total amount which can be paid.

Can non-earners make pension contributions?

Even those who do not have any earnings can contribute to a pension scheme, but there is a limit. The maximum payment that can be made is £2,880 each year. The tax man will add tax relief of £720 making the contribution worth £3,600 in the pension fund.

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