Listen: Make the most of pension tax relief

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MoneyPlus Features Team

21st March 2019 at 9:52am

What is tax relief, how much do you get and why does it give your pension a real edge over most other saving options?

Listen to our two-minute Q&A to find out.

Audio transcript

Hello and welcome.

My name is Ian Schofield and today I’m chatting to our pension expert, Bob Gordon, about something our customers often ask about – pension tax relief.

So Bob, what is tax relief and why does it matter?

Pension tax relief means the taxman effectively chips-in when you save into pensions. This gives pensions a real edge over most other saving options.

So how much tax relief do you get?

It’s largely based on the rate of income tax you pay. If you pay basic rate income tax you get 20% relief, so it normally only costs you £80 to save £100 into your pension. And if you pay higher rates of tax, saving more can cost you even less.

For example, a £100 pension top-up only costs you £60 if you’re a 40% taxpayer – or £55 if you pay 45% tax.

That sounds like a great deal. Are there limits to the amount of tax relief you can get?

Easy bit first. You only get tax relief on pension savings, up to the amount you earn in the tax year. So, for example, if you earn £25,000 that’s the most you can pay into your pension and get tax relief.

Now to the tricky bit.

You also have an ‘annual allowance’, which can limit your pension saving tax breaks – regardless of what you earn.

  • The good news is, this allowance is normally £40,000 a year, so it won’t affect most people
  • And it can be even more, if you haven’t used your full allowances in the last three years
  • But it might be much less, if you earn over £110,000 a year or have started taking your pension

And remember, you still can’t get tax relief on pension savings above your earnings, even if you have more allowance available. These rules are complicated, so if you think they might affect you I’d recommend speaking to a financial adviser.

So, to wrap up, what are your top tips for people to get the most out of tax relief?

Number one – think about saving as much as you can reasonably afford into your pension to make the most of these tax breaks.

Second, try to start saving into your pension as soon as you can so your money has longer to grow.

Thirdly, if you’ve got an ISA or other savings, consider putting them into your pension instead to get the tax relief boost.

This normally ties your money up until you’re 55 though, so make sure you don’t save money into your pension that you might need before then.

Bob – thanks for giving us lots to think about today.

To everyone listening, thanks very much for joining us, and remember, with all investments, the value of your pension can go down as well as up and there’s always a chance you might get back less than was paid in.