There are lots of benefits associated with pension saving, and one of the greatest is reduced tax. When saving into your pension program, the government will reward you for saving for the future in the form of tax relief.

All the money that you direct to your pension scheme receives basic rate tax relief at source. This boosts your savings instantly, allowing your funds to grow faster than many other investment types. If you’re an additional rate or a higher rate taxpayer, there is further tax relief available. However, you won’t automatically receive the full relief you’re entitled to.

This detailed guide gives an overview of pension tax relief and how it works for higher rate and additional taxpayers. Keep reading to understand what you’re eligible for and how you claim it.

Overview of Pension Tax Relief?

In essence, pension tax relief refers to the government’s reward if you save for the future. When you earn the bonus, a percentage of the funds that you were to pay as tax from your earnings will be channelled into your pension pot and not to the government. Better right?

The relief will contribute to your pension contribution based on your highest income tax rate. Therefore:

  • Basic rate taxpayers are entitled to a pension tax relief of 20%
  • Higher rate taxpayers are entitled to pension tax relief of 40%
  • Additional rate taxpayers can receive a 45% pension tax relief

For instance, if you’re in the basic rate tax band level contributing £100 from your income to your pension scheme, you’ll actually part with £80. The government will add the extra £20, an amount that would have been deducted as tax from your £100.

But if you’re in the additional rate (45%) or higher rate (40%) categories, you’ll pay just £55 and £60 respectively to accomplish the £100 pension savings.

Notably, taxpayers in Scotland use a different income tax banding, and the tax relief is issued in a slightly different approach.

The income tax rate for starter rate taxpayers is 19%, but they receive a pension tax relief of 20%. On the other hand, basic rate taxpayers pay an income tax of 20% and receive the same percentage in pension tax relief. The income tax rate is 21% for intermediate rate taxpayers, and this group can claim a 21% pension tax relief.

Higher rate taxpayers have relatively higher income tax and pension tax relief rates, both at 41%. If you’re a top rate taxpayer here, you’ll pay an income tax rate of 46%, and you can claim a 46% relief.

This guide mainly focuses on Wales, England, and Northern Ireland.

What Is the Pension Allowance for 2023/24 and 2024/25?

Here’s all you need to know to calculate your pension allowance for the 2023/2024 period:

Annual Allowance

The annual allowance is essentially the maximum amount in pension contributions on which you can earn full tax relief in one tax year. You’re free to contribute a higher amount than this. But if you do so, you’ll be required to pay an Annual Allowance Charge (AAC) to the tax authorities on your tax return as a way of “giving back” the tax relief.

So, how does it work? Check out the comparison between the old and new schemes.

2019/20 tax year and earlier:

Previously, the annual allowance stood at £40,000. The only exceptions were those with flexible access to a pension, anyone earning a basic income above £110,000, or any taxpayer whose adjusted income was higher than £150,000 (including pension contributions from your employer).

After these allowances, taxpayers had to go through TAA (Tapered Annual Allowance) that made them begin losing an Annual Allowance of £1 on every £2 of adjusted income beyond the £150,000 limit (the adjusted income). It would go on like this until the adjusted income reached £210,000 where the Annual Allowance reduced to £10,000 (the lowest amount under the old scheme).

2020/21 – 2022/23 tax years

The scheme maintains £40,000 as the Annual Allowance. However, the thresholds aren’t the same. For the 2020/21, 2021/22 and 2022/23 financial year, the allowance begins to taper once your basic income goes past £200,000 (instead of the initial £110,000), or if your adjusted income is more than £240,000 (rather than the initial £150,000). So the good news is that this tapering now impacts fewer taxpayers.

The bad news is that the tapering can slash the annual allowance to as low as £4,000 instead of the previous £10,000 allowance limit.

2023/24 – 2024/25 tax years

In the 2023 Spring Budget, the chancellor increased the Annual Allowance from £40,000 to £60,000. For the 2023/24 financial year, the allowance begins to taper once your basic income goes past £260,000 (instead of the previous £240,000). The threshold income will remain £200,000 as the adjusted limit is threshold income + maximum contribution. The tapered lower limit increased from £4,000 to £10,000. 

Check out the table below for more insights into the actual Annual Allowance amounts.

Notably, you can carry over your allowance for previous years that remain unused for the last three years. It’s also important to note that charges will be deducted from your benefits when you go over your annual allowance, provided they’re more than £2,000.

Pension Tax Relief Calculations for Additional And Higher Rate Taxpayers

Unlike the basic rate taxpayers, both additional and higher rate tax relief are offered through increased income tax thresholds, and the difference must be equivalent to the contribution to your pension scheme.

HMRC allows a proportion of a taxpayer’s income in these brackets to be charged a lower tax rate, translating to a reduced overall tax liability by the equivalent relief on your pension contributions.

Consider these examples:

Scenario A

You make £70,000 of income every tax year, but don’t make any pension contributions. In this case, £20,000 of your income will be subject to a higher-rate tax of 40% – equating to £8,000.

Scenario B

You make £70,000 of income every tax year, and invest £20,000 as your total gross pension contribution. In this case, the £20,000 pension contribution is subject to tax relief, so you are only required to pay tax on your remaining £50,000 of income.

In scenario B, you qualify for 40% pension tax relief, but only 20% of this will be applied at source. You are still owed £4,000 relief and below we’ll explain how you can claim this back.

The same approach applies if you’re an additional rate taxpayer, and your adjusted income meets the threshold where you’re eligible for 45% pension tax relief. In your situation, you’d need to claim an additional 25% as explained below.

How to Claim Your Tax Relief

Your pension provider will claim some pension tax relief at source. However, it’s your responsibility for claiming the remaining amount. You can achieve this by writing to HM Revenue and Customs, or via self assessment – which we can help prepare and file on your behalf.

If you don’t receive your pension tax relief automatically or haven’t yet claimed the extra entitlement, you can back-date your tax relief claims for the last four years. All you need to do is contact HMRC or your local tax office. Again, we can do this on your behalf if you require.

What Is Lifetime Allowance

The lifetime allowance limited the amount taxpayers could receive from their pensions without additional tax charges. There have been changes to the Lifetime Allowance charge since 6th April 2023, please see our Lifetime Allowance guidance.

Consult with your pension provider for precise projections on the worth of your benefits at retirement. This way, you can plan accordingly.

DS Burge & Co for financial expertise

It is possible to claim your pension tax relief and file your self assessment tax return on your own. However, it can cause a large degree of stress, and you want to ensure you are benefiting from all available tax relief.

Helping businesses and individuals around Surrey & London since 1980, we’ve gained a wealth of experience calculating available pension tax relief and filing tax returns for our customers. We welcome every client with a friendly professional service that focuses on individual needs.

We aim to help you reduce your tax liability and free your time from the regulatory hassle. For example, we can help with:

If you need assistance filing your self assessment tax return, please don’t hesitate to contact us. We can help assess your personal situation and provide the full support that you need. We are ready to answer your questions and discuss how we can help.