Tax relief on pension contributions

Getting tax relief on pensions means some of your money that would have gone to the government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

Tax relief on your annual pension contributions

If you’re a UK taxpayer, in the tax year 2018-19 the standard rule is that you’ll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.

  • For example, if you earn £20,000 but put £25,000 into your pension pot (perhaps by topping up earnings with some savings), you’ll only get tax relief on £20,000.
  • Similarly, if you earn £60,000 and want to put that amount in your pension scheme in a single year, you’ll normally only get tax relief on £40,000.

Any contributions you make over this limit won’t attract tax relief and will be added to your other income and be subject to Income Tax at the rate(s) that applies to you.

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

But there is an exception to this standard rule.

If you have a defined contribution pension, and you start to draw money from it, the annual allowance reduces to £4,000 in some situations (see, The Money Purchase Annual Allowance, below).

Since April 2016 the annual allowance is also reduced if you have an income of over £150,000, including pension contributions.

The Money Purchase Annual Allowance (MPAA)

In the tax year 2018-19, if you start to take money from your defined contribution pension, this can trigger a lower annual allowance known as the Money Purchase Annual Allowance or MPAA.

For the tax year 2018-19 the MPAA is £4,000.

Whether the MPAA applies depends on how you access your pension pot and there are some complicated rules around this.

As a basic guide though, the main situations when you’ll trigger the MPAA are:

  • if you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot
  • if you put your pension pot money into a flexi-access drawdown scheme and start to take income
  • if you buy an investment-linked or flexible annuity where your income could go down
  • if you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap

And you won’t normally trigger it if you:

  • take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
  • take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
  • cash in small pension pots valued at less than £10,000.

You can’t carry over any unused MPAA to another tax year.

The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

Tax relief if you’re a non-taxpayer

If you’re not earning enough to pay Income Tax, you’ll still qualify to have tax relief added to your contributions up to a certain amount.

The maximum you can pay is £2,880 a year. Tax relief is added to your contribution so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this.

How much can you build up in your pension?

A lifetime allowance puts a top limit on the value of pension benefits that you can draw benefits from without having to pay a tax charge.

The lifetime allowance is £1,030,000 for the tax year 2018-19.

Any amount above this is subject to a tax charge of 25% if paid as pension or 55% if paid as a lump sum.

Workplace pensions, automatic enrolment and tax relief

All employers are now required to automatically enrol all eligible workers into a pension scheme.

It requires a minimum total contribution, made up of the employer’s contribution, the worker’s contribution and the tax relief.

Find out more in our guide below.

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