Skip to content
Relief

All You Need to Know About Pension Tax Relief

They create a pension tax relief when you save into your pension, and the government tops it up as an incentive to continue saving for your future. The amount of tax relief you get depends on your income tax.

How does pension tax relief work?

Pension tax relief on your contributions works in 2 different ways: relief at source and net pay. In workplaces, the employer usually decides which avenue to use. However, being under a personal pension plan is where the relief at the source method is used.

Relief at source

With relief at the source, the government tops up your contributions. There is always a chance to claim more back through your tax return if you pay tax above the introductory rate. In short:

  1. Your employer deducts tax from your taxable income.
  2. Your pension contribution is deducted from after-tax pay and sent to your service provider. Self-employment means you make these contributions from your earnings to your pension provider.
  3. Your pension provider then takes a percentage of tax relief from the government, which they add to your pension fund.

Net Pay

With net pay, forward pension contributions before tax payments. This results in your paying less tax because they calculate it based on the lower half of your earnings. This means:

  1. Your employer deducts the total amount of your pension contribution from your salary before tax deductions.
  2. After that, pay tax on earnings minus your tax contributions. This results in a decreased tax bill and a larger pot to take home.
  3. Despite paying the total pension contribution, you are awarded your tax relief immediately through decreased tax payments.

How to know what type of tax relief method your scheme is using

This is done by checking your scheme booklet. You can also ask your HR department/whoever issues paychecks for your employer, or you can check with your pension provider.

Be sure to ask if the scheme is using:

  • The net pay method–total pension contributions from pre-tax pay.
  • Relief at source method–Lower pension contributions taken from after-tax pay and tax relief claimed from the government by your pension provider.

Similar Article: How to Develop Financial Discipline for Retirement Success

Conclusion

It can take the large sum of information you can get from now on with this process done the right way, from working with your service provider or having a conversation with your employer or HR department to negate any potential issues that may arise.

They create a pension tax relief when you save into your pension, and the government tops it up as an incentive to continue saving for your future. The amount of tax relief you get depends on your income tax.

How does pension tax relief work?

Pension tax relief on your contributions works in 2 different ways: relief at source and net pay. In workplaces, the employer usually decides which avenue to use. However, being under a personal pension plan is where the relief at the source method is used.

Relief at source

With relief at the source, the government tops up your contributions. There is always a chance to claim more back through your tax return if you pay tax above the introductory rate. In short:

  1. Your employer deducts tax from your taxable income.
  2. Your pension contribution is deducted from after-tax pay and sent to your service provider. Self-employment means you make these contributions from your earnings to your pension provider.
  3. Your pension provider then takes a percentage of tax relief from the government, which they add to your pension fund.

Net Pay

With net pay, forward pension contributions before tax payments. This results in your paying less tax because they calculate it based on the lower half of your earnings. This means:

  1. Your employer deducts the total amount of your pension contribution from your salary before tax deductions.
  2. After that, pay tax on earnings minus your tax contributions. This results in a decreased tax bill and a larger pot to take home.
  3. Despite paying the total pension contribution, you are awarded your tax relief immediately through decreased tax payments.

How to know what type of tax relief method your scheme is using

This is done by checking your scheme booklet. You can also ask your HR department/whoever issues paychecks for your employer, or you can check with your pension provider.

Be sure to ask if the scheme is using:

  • The net pay method–total pension contributions from pre-tax pay.
  • Relief at source method–Lower pension contributions taken from after-tax pay and tax relief claimed from the government by your pension provider.

Similar Article: How to Develop Financial Discipline for Retirement Success

Conclusion

It can take the large sum of information you can get from now on with this process done the right way, from working with your service provider or having a conversation with your employer or HR department to negate any potential issues that may arise.

Back To Top