How tax relief can increase the size of your pension pot. Talis IFA answers some common questions.

We’re all familiar with the idea that the sooner you start saving for your pension, the better. A longer period of contributions, combined with the power of compound interest, make a big difference, even if you can only afford to save a small amount each month.

One thing we often find ourselves explaining is how tax relief adds to the amount you put into your pension, helping to increase its value without any additional cost to you. In essence, it's free money.

We pulled together some of the most common questions that our Talis IFAs are asked:

1.? ? Who can benefit from tax relief on pension savings?

If you’re under 75 and have relevant UK earnings, you can benefit from tax relief when contributing to a personal pension – like a Self-Invested Personal Pension Plan (SIPP) or workplace pension scheme within your annual allowance.

2.? ? What is meant by ‘relief at source’?

The government provides basic rate tax relief of 20% through ‘relief at source,’ which is claimed by the pension provider from HM Revenue & Customs (HMRC). For instance, if you invest ￡8,000 in your pension, the government adds ￡2,000, making your total contribution ￡10,000.

3.? ? What difference does it make if I’m a higher or additional rate taxpayer?

Higher and additional rate taxpayers can also reclaim further tax relief on their pension contributions. In the 2023/24 tax year, the higher rate tax starts at just over ￡50,000 of income per year, while the additional rate begins at ￡125,140.

The tax rates for earned income at these levels are 40% and 45%, respectively. This means that higher and additional rate taxpayers can reclaim an extra 20% or 25% on their pension contributions.

Using the previous ￡10,000 example, these taxpayers may be eligible for a refund of up to ￡2,000 or ￡2,500, respectively.

4.? ? How do I claim this extra tax relief if I’m a higher or additional rate taxpayer?

The first step is to be contributing to a pension scheme, which must be a registered pension scheme, either through your employer or a personal pension plan.

a. ? ? Check if you receive tax relief automatically:

If you’re part of an occupational workplace pension scheme, your employer might already deduct your contributions from your salary before applying tax. In this case, you’ll automatically receive tax relief at your highest Income Tax rate.

If your pension plan, workplace or not, is a personal pension, you will usually make your contributions from after-tax income but net of 20% basic rate relief.

Any higher rates of relief need to be claimed from HMRC. If your contributions are made using salary sacrifice you won’t need to claim any tax back as this is given to you automatically.

b.? ? Claim additional tax relief through Self-Assessment

If your pension provider claims tax relief for you at the basic rate, and you’re a higher rate taxpayer, you’ll need to claim the additional tax relief through a self-assessment tax return (or tax code adjustment).

To do this, you’ll either need to register for self-assessment on the HMRC website and complete the form annually, declaring your pension contributions, or adjust your tax code.

If you don’t want to file a self-assessment tax return, you can contact HMRC to adjust your tax code to claim higher rate relief (but not additional rate relief).

You’ll need to provide them with details of your pension contributions and relevant information about your income. They’ll update your tax code, and you’ll receive the additional tax relief through your PAYE (Pay As You Earn) system.

?

Remember, tax rules can change and individual circumstances may vary. If you’d help to check that you’re benefiting from all the tax relief you’re entitled to, or would like to review your pension arrangements in detail, Talis IFA are here to help.

Our independent financial advisers are experts at guiding our clients through the complex tax rules around pensions, and at keeping up-to-date with changes.

We’re known for our straight-talking financial advice in plain English, and will guide you through any steps you need to take. We’re on your side, and we’ll review your current position to identify any ‘pension gap’ (that is, the gap between what you will need to maintain your lifestyle in retirement, and what’s it your pension pot) and recommend strategies for closing the gap. We’re also known for our transparency – if there’s no gap, and no problem, we’ll say so! We never recommend solutions that you don’t need.

Click here to find a Talis IFA.

?

?

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.