Private Pensions and Tax

Posted 22/07/2019

All employers are legally obliged to automatically enrol their workers into a pension scheme, through a pension provider of the company’s or employee’s chosen provider. Individuals who do not have their pension paid through a PAYE scheme will have to make their own contributions to their chosen provider. This can be done as regular direct debit payments or as one-off payments throughout the year when funds are available.

Tax relief is available to UK taxpayers on pension contributions of up to 100% of their earnings or £40,000 annual allowance – the lowest value of the two is the amount available. Employees are only subject to the tax relief on their tax returns if their employer deducts the pension before deducting income tax. This information can be calculated using the employee’s payslips. If the pension is deducted after the tax is deducted, the relief has already been applied.Examples: an individual who earns £30,000 may put £35,000 into their pension; in this case it is likely the high pension payments are due to an individual transaction. However only £30,000 would be subjected to tax relief, as this is the amount of earnings in the tax year. If an individual earns £70,000 and pays £50,000 to the pension pot, only £40,000 of their earnings would be subject to tax relief which is the lower amount of £40,000 or earnings.

The tax relief is claimable if you pay tax at rates above 20% which is the basic rate tax band for England, Wales and Northern Ireland; the pension provider claims 20% and thus decreases the tax rates used for the individual’s tax calculation. So, the original rate of 40% for the higher tax band becomes 20%, and 45% for the additional rate becomes 25% in the individual’s calculation.

The rates are now different in Scotland from the rest of the UK so for individuals who pay tax at 21% this becomes 1%; 41% becomes 21%; 46% becomes 26%.

If an individual pays more than the £40,000 annual allowance they will have to pay tax on the amount contributed that exceeds this. Pension providers will often send out statements if this amount in these cases, but if the person has more than one provider they would need statements from all providers at the end of the year as the providers will not share the contribution amounts with each other. If there is any unused annual allowance from the last three tax years this can be used to increase the allowance for the tax year return being prepared. The annual allowance of £40,000 can be affected if the individual withdrew money from the pot or if their threshold income is higher than £110,000; these factors will decrease the value of the annual allowance for that person.
This tax would not apply to someone who retired and withdrew their pension pots due to a serious illness or someone who died during the tax year.The tax relief is calculated in the self-assessment tax returns though if an individual does not fill in one of these, they can contact HMRC directly. If the pension provider is not registered with HMRC then tax relief will not be available to the individual.

Tags: Self-assessment tax return, Personal tax, pension contributions, pension providers