Our experts at DSR Tax Refunds know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.
Do you have to pay tax on your private pension contributions?
Most private pension contributions are tax-free up to certain limits. This includes most forms of private pension scheme, including workplace pensions, personal pensions, stakeholder pensions and overseas pension schemes which qualify for tax relief.
You do have to pay tax when you take money out of a pension.
What are the limits to tax-free contributions?
You will have to pay tax on your private pension contributions if your pension pots exceed:
- 100% of your earnings in a year because this is the limit for the tax relief you are entitled to
- £1,073,100 in your lifetime (known as the lifetime allowance)
- £40,000 a year (known as the annual allowance)
You will also have to pay tax on your private pension contributions if your pension provider isn’t registered for tax relief with HMRC or fails to invest your pension pot in line with HMRC’s investment rules.
How do you get this tax relief?
You are entitled to claim tax relief on your pension contributions up to 100% of your annual earnings. You get this automatically if your employer takes your workplace pension contributions directly out of your wages before deducting Income Tax, or if your pension provider claims tax relief on your behalf at 20% and adds it into your pension pot (this is called ‘relief at source’).
You get relief at source from all personal and stakeholder pensions as well as some workplace pensions.
It’s your responsibility to make sure you’re not claiming tax relief on pension contributions above 100% of your annual earnings. If you do, HMRC can ask you to repay anything over this limit.
You might have to claim the tax relief yourself if:
- You pay Income Tax at a rate above 20% and your pension provider claims the first 20% for you as relief at source
- Someone else pays into your pension
- Your pension scheme isn’t set up for automatic tax relief.
If you pay Income Tax at 40%, you can claim the extra 20% tax relief through your Self Assessment tax return. If you don’t need to send a tax return, call HMRC on 0300 200 3300 (textphone 0300 200 3319) and they will let you know what you need to do to claim that tax relief.
If you pay Income Tax at 45%, you can only claim the additional 25% tax relief through a Self Assessment tax return.
If your pension scheme isn’t set up for automatic tax relief at source, you need to claim this tax relief through your Self Assessment tax return. You need to call HMRC on 0300 200 3300 (textphone 0300 200 3319) and they will let you know what you need to do to claim that tax relief if you don’t use the Self Assessment service.
If your pension provider isn’t registered with HMRC, you can’t claim this tax relief.
If someone else pays into your pension scheme (for example, your spouse or civil partner), you automatically get tax relief at 20% if it is claimed at source by your pension provider. If your workplace pension allows contributions from other people, you need to call HMRC on 0300 200 3300 (textphone 0300 200 3319) and they will let you know what you need to do to claim that tax relief on those contributions.
What happens if you don’t have to pay Income Tax?
If you don’t have to pay Income Tax for any reason, you will still get tax relief automatically. This will be at 20% for the first £2,880 that you pay into your pension each tax year. Both of the following circumstances must apply though:
- You don’t pay Income Tax. For example, you might be on a low income, which is below the Personal Allowance threshold.
- Your pension provider claims tax relief at source for you at a rate of 20%.
Can you get tax relief on Life Insurance policies?
You’re not entitled to tax relief if you use your pension contributions to pay for a personal term assurance policy, unless it is a protected policy. Personal term assurance policies are life insurance policies which either end when the first insured person dies or insures people from the same family.
What is the annual allowance?
If the savings you invest in your pension pot exceed a certain limit in a tax year, you will be expected to pay tax. This annual allowance is currently set at £40,000.
What is the Lifetime Allowance?
If your pension pots are worth more than £1,073,100, this means they are worth more than the Lifetime Allowance amount and you will usually be expected to pay tax. You might be able to protect your pension pot from these reductions.
You can ask your pension provider to check how much of your lifetime allowance you have used. This lifetime allowance applies across all the pension schemes you belong to, so if you belong to more than one, you will need to ask all your pension providers to check this for you and then add up how much you have used in each pension scheme.
What counts towards your allowance depends on the kind of pot you belong to
|Type of pension scheme||What counts towards the lifetime allowance|
|Defined contribution schemes (personal, stakeholder, most workplace schemes)||Money in the pension pot that will go towards paying you, however you decide to take that money|
|Defined benefit schemes (some workplace schemes)||Usually 20 times the pension you get in the first year plus your lump sum.|
Your pension provider can ask you to provide them with information about the other pension schemes you belong to so they can check whether you are above your lifetime allowance if you decide to take money from your pension pot, turn 75 or transfer your pension overseas.
If you go over your lifetime allowance, your pension provider will deduct the tax before you start getting your pension. They will also send you a statement telling you how much tax you owe as a result. You will need to report this on your Self Assessment tax return. If you die before you take your pension, HMRC will send a tax bill to the person who inherits your pension.
Reporting changes to HMRC
You can lose your protection if any of the following apply:
- You make new savings in a pension scheme
- You transfer savings between pension schemes in a way that breaks transfer rules
- You are enrolled in a new workplace pension scheme
- You have enhanced protection and when you receive your pension benefits, they have increased in value by more than is allowed in the enhanced protection rules
- You have fixed protection and the value of your pension pot in any given tax year grows at more than the allowed rate.
You need to report these changes to HMRC, either online or by post. If you think your employer is likely to enrol you in a workplace pension scheme, you can ask to opt out. If you think you have lost your protection, you also need to inform HMRC.
How can DSR Tax Refunds help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Refunds are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
This page was last updated on 15/09/2020.