Tax relief: We’ve got you covered

Over the next few weeks we’ll look at how tax affects your retirement savings:

– while you’re working and saving, and 

– while you start taking your retirement income.

Rise more, go further…

Tax relief is a bit like baking powder in a cake. It’s the secret ingredient that can help your retirement savings rise more and go further.

You don’t pay income tax on pension contributions, so some of that money goes into your retirement savings instead.

As a rough guide, if you pay basic-rate tax at 20%, the government adds another £10 to every £40 you pay in (for most pensions this happens automatically).

Pay more than basic-rate tax? You’ll need to claim some of your tax relief

You can do this through your self-assessment tax return.

… but know your limits

Cake is great, but you can have too much of it. It’s the same with retirement savings. Know your limits, so you don’t put too much in and end up paying extra tax charges.

The annual allowance

This is the limit on the amount of retirement savings you can make in a tax year (April to April) before a tax charge might apply. It’s £40,000 a year.

The annual allowance covers your and your employer’s contributions to all the pensions you’re actively saving into, including your workplace pension and any personal pensions you have. You should also be aware that you can only receive tax relief on your own contributions up to 100% of your earnings.

You can carry forward any annual allowance you haven’t used for up to three years.

High income? Your annual allowance could be lower

If your income from all sources totals more than £240,000 a year your annual allowance is likely to be lower, down to a minimum of £4,000 a year.

We’ve got a helpful briefing note about this.

The lifetime allowance

This is for the total amount of retirement savings you can build up over your lifetime without having to pay extra tax – including all your work and personal pensions (but not your State Pension). The lifetime allowance is currently £1,073,100.

Do you need protection?

If your retirement savings are near the lifetime allowance, or in danger of going over it, you might want to look at lifetime allowance protection.

We can make it less taxing for you

Head to our online Resource Centre for lots more information about tax when you’re saving into a pension, with simple, straightforward explanations of:

–  pension tax relief

–  the annual and lifetime allowances, and

–  what you can do to avoid paying too much tax.