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Pension Tax Relief – How to save 60% tax.

Outside of the financial services industry I’ve met very few people who understand pension tax relief properly. It’s understandable, pension tax relief is a complex subject, and the rules are frequently changed. And it’s because it’s so complicated, I come across many employees who are paying tax at 60% unnecessarily and don’t know there is a simple way to save for the future and reduce their tax liability. Yes, I know, I can hear you all scream that income tax is either 20%, 40% or 45% and you’d be correct. But for some they pay an effective rate of income tax of 60% and I’m going to explain why, but first let’s cover the basics of pension tax relief.

How does pension tax relief work?

On personal pension contributions pensions tax relief is paid at your highest marginal rate of income tax.

  • Basic rate taxpayers get 20%
  • Higher rate taxpayers can claim 40%
  • Additional rate taxpayers can claim 45%

In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly alternative way. That means for a basic rate taxpayer for every £1,000 you contribute HMRC add £250 as pension tax relief.
If you are a higher rate taxpayer and make pension contributions under the “relief at source” method, you can claim a further £250 via your self-assessment. That’s a total of £500 tax relief on a £1,000 contribution. A 50% bonus just for saving for the future.

How about a 75% Bonus?

If you are fortunate enough to earn over £100,000 you still pay income tax at 40%, You don’t start paying the additional rate until your reach an income of £150,000. However, for every £2 of income over £100,000 your personal tax free allowance is reduced by £1. Someone earning £125,000 would have their personal allowance reduced to £0, which means they are effectively paying 60% income tax on their earnings between £100,000 and £125,000. So how can pensions tax relief help?
Well, if they made a personal pension contribution of £20,000 you benefit from £5,000 pension tax relief at source. You would also be able to claim a further £5,000 via your self-assessment. And because the gross contribution is taken off your income i.e. £125,000 – £25,000 = £100,000 you would get all your personal allowance back so a further £12,500 @ 40%. That’s another £5,000. In total you would benefit from £15,000 tax savings relief. That’s a whooping 75% in combined tax savings and pension tax relief.

How 4 Financial Planning can help?

Do not underestimate the complex nature of pension tax relief. I recently had a client who thought he could carry forward when they couldn’t, they sent HMRC a cheque for £18,000. At 4 Financial Planning, we are pension experts, and it pays to have an expert on your side. As the famous firefighter, Red Adair said “If you think hiring a professional is expensive, wait until you’ve hired an amateur”.


We offer a free initial consultation and pension review service if you’d like to arrange something either call one of the team on 0117 457 9945 or book a meeting using this link.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

The information is based upon our interpretation and understand of HMRC guidelines. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change, and their value depends on the individual circumstances of the investor. Rates used based upon the 2021/2022 tax years.

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