What is the personal pension tax relief and how is it applied?

Ensuring you have enough money to live comfortably in retirement can be challenging.

Personal pensions are a key part of retirement planning for most people and can enable individuals to build up substantial pension pots for later life.

Personal pension tax relief can help you build up your pension savings.

Can you claim tax relief on personal pension?

Personal pensions provide a valuable means of saving for retirement, either as a standalone provision or complementing workplace schemes.

One of the main advantages of contributing regularly to a personal pension is the personal tax relief available.

This means that some of the money that the government would have taken in tax on your earnings is redirected into your pension pot when you make a contribution.

For instance, were you to contribute £1,000 into your pension, the tax that has been deducted from that £1,000 of earnings will be added to your pension pot. 

Personal pension contributions and tax relief combined can make a significant difference to the size of your retirement pot over time.

How does HMRC calculate personal pension relief?

His Majesty’s Revenue and Customs ((HMRC) has a simple process through which it calculates personal pension payments tax relief.

When you contribute to your personal pension, your pension provider will claim tax relief at the basic rate of 20 per cent on your behalf from HMRC.

In practice, this means that for every £100 you contribute, £25 is added by the government, bringing the total contribution to £125.

If you’re a higher or additional rate taxpayer, you can claim extra tax relief through your self-assessment tax return.

What this means is that higher rate taxpayers can claim an extra 20 per cent tax relief, or if you’re an additional rate taxpayer you can claim an extra 25 per cent tax relief.

How much of a personal pension is tax-free?

Currently, people can access their personal pension pot from the age of 55. This will rise to 57 on April 6 2028.

Upon reaching the qualifying age, individuals can take 25 per cent of their pension pot tax-free. The remaining 75 per cent will be subject to income tax.

This tax treatment applies to most pension options, including lump sum withdrawals, buying an annuity, or flexible drawdown.

Tax rules can and do change, and your individual circumstances may vary, so it’s important to seek professional financial advice to understand your particular tax implications.

How to claim tax relief on personal pension contributions

It’s a straightforward process for claiming tax relief on personal pension contributions and in most cases will be applied directly to your contributions without the need for a separate claim being made.

If you’re a basic rate taxpayer, the tax relief on your pension contribution will be added to your contribution by your providers.

This means that for every £100 you contribute, your provider claims an additional £25 from HMRC, making the total contribution £125. You don’t need to do anything further to claim this relief.

If you’re a higher rate or additional rate taxpayer, you can claim additional tax relief through your self-assessment tax return. When completing your tax return, you’ll need to declare your pension contributions in the relevant section.

The amount of tax relief you can claim depends on your marginal tax rate. For higher rate taxpayers, this will add 20 per cent of your gross pension contribution, while for additional rate taxpayers, it’s 25 per cent.

It’s critical that you keep accurate records of your pension contribution, especially if you’re claiming additional tax relief through your self-assessment tax return.

This includes keeping records of any contributions you make, as well as any communications from your pension provider or HMRC regarding tax relief.

Personal tax and pension advice from DAAFL

With tax legislation liable to change, reporting requirements becoming ever more complex, and the risk of investigation increasing, it’s never been more important to ensure your tax affairs can withstand scrutiny.

Our experienced team of financial specialists at DAAFL can provide tailored tax and pension advice to ensure you maximise your tax relief while meeting your obligations.

Contact us to find out more about our services.