How pension tax relief works

You’re only entitled to tax relief on a certain amount of pension contributions each tax year, known as your Annual Allowance. For the tax year between 2021 and 2022, the government has set this amount at £40,000.

This means that you can earn tax relief on pension contributions of up to 100% of your earnings, or £40,000 a year, whichever is lower, across all the pensions you have. If you’re earning £60,000 a year for example, that means you’d be able to pay up to £40,000 of this into your pension.

The £40,000 limit covers any contributions you or your employer make and includes pension tax relief.

Any pension payments you make over the £40,000 threshold will be subject to usual income tax rates.

However, you can carry forward any unused Annual Allowances from the previous three years, as long as you were a member of a pension scheme during those years.

If you’re on a very high income, your Annual Allowance reduces. If your income added to any pension contributions you or your employer make (known as your ‘adjusted income’) is more than £240,000, then for every £2 it goes over this limit, your Annual Allowance goes down by £1. The minimum reduced Annual Allowance you can have is £4,000.

There’s also a Lifetime Allowance, which is the maximum you can save into your pensions without having to pay any extra tax charges when you take money out of them.

The Lifetime Allowance is currently £1,073,100 in the 2021/22 tax year.

You can find out more about how the Annual and Lifetime Allowances work in our article Understanding your pension allowances.

Author: wpadmin

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