Pensions: how does tax relief work?

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An individual makes their pension contributions out of their taxed and NIC’d income. Most individual pension contributions are made “net of tax”.  The pension scheme will then gross up the payment by claiming 20% tax relief from the government.  So for £80 contributed by the individual, the scheme also gets £20 from government, giving a total contribution of £100.

An individual who is a basic rate taxpayer does not need to make a separate tax relief claim: no further tax relief is given. A higher rate taxpayer can obtain higher rate tax relief on contributions paid. The amounts paid need to be reported to HMRC under self assessment.

However a company pension (aka employers pension) contribution attracts corporation tax relief for the company, but does not attract further contribution to the scheme from government.  So a company contributing £100 to a pension will cost the company £81 (after reducing corporation tax by 19%).  The pension scheme simply receives the £100.

Often an employers pension contribution is preferable if there is a choice.  This is because no national insurance will have been paid on the money used to make the pension contribution.  This contrasts with a personal pension contribution paid from salary, on which employees and employers national insurance will have been paid.

As with all of our tax tips and web pages this information is necessarily summarised and of a general nature.  If you would like detailed specific advice please contact us.