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Pension Contributions - Member

A review of the criteria to make personal contributions, the different methods for attracting tax relief and some tax planning opportunities using pension contributions.

Key Points

Individuals, employers or third parties can make contributions to a registered pension scheme.

Individuals can normally make contributions up to 100% of their relevant UK earnings or up to £3,600, if they either have no earnings or their earnings are less than that figure.

There are three methods of claiming tax relief on individual pension contributions: 1) relief at source, 2) net pay and 3) making a claim.

Individual contributions can be used to mitigate tax against some investment gains, reclaim all or part of the personal allowance or eliminate or reduce the High Income Child Benefit Tax Charge.


Which contributions qualify for tax relief?

How does an individual qualify for tax relief?

To get tax relief on relievable pension contributions an individual needs to be both:

  • An active member of a registered pension scheme; and
  • A relevant UK individual

How much can an individual contribute and get tax relief?

This is normally the greater of:

  • £3,600 * (known as the basic amount); and
  • 100% of the individual’s relevant UK earnings subject to UK income tax (in the tax year the contribution is made)

* For relevant UK earnings subject to tax, which are less than £3,600, tax relief on the difference up to the £3,600 level is only available using the relief at source (RAS) method.

Are there any exceptions?

The following won’t count as relievable pension contributions on the member:

  • Member contributions paid after age 75
  • Employer contributions
  • Age related or minimum payments
  • Life assurance premium contributions paid to a registered pension scheme (after 5 April 2007 or after 31 July 2007 for occupational schemes)

What types of earnings attract tax relief?

Relevant UK earnings include (although this list is not exhaustive):

  • Employment income (e.g. pay, wages, bonus, overtime or commission)
  • Any redundancy payment above the £30,000 tax exempt threshold
  • Benefits in kind which are taxable
  • Profit related pay (including the part which is not taxable)
  • Income from a trade, profession or vocation conducted individually or as a partner personally acting in a partnership
  • Rental income from UK or EEA furnished holiday lettings businesses
  • Patent income


Relevant UK individuals

What is a relevant UK individual?

Individuals that:

  • Have relevant UK earnings chargeable to income tax for that tax year
  • Are resident in the UK at some time during that tax year
  • Were Crown employees (or their spouse/civil partner) with earnings from Crown employment subject to UK tax
  • Are non-UK resident but were UK resident when they joined a registered pension scheme and at some time during the five tax years preceding the tax year in which they were no longer UK resident

The different ways tax relief can be claimed

METHOD OF TAX RELIEF HOW THE TAX RELIEF WORKS
1. Relief at source, for example, personal pensions and stakeholder schemes Basic rate relief is added directly into the pension scheme from their net income. Higher and additional rates are claimed through self-assessment
2. Net pay arrangement, for example, occupational schemes Employer deducts contributions from gross salary providing immediate relief for basic, higher and additional rate taxpayers
3. Making a claim (via HMRC), for example, retirement annuity contracts Claimed though self-assessment

Example - Relief at source

How does this work?

  • Individual’s earnings will be subject to deduction of tax in full

For basic rate taxpayers:

  • Basic rate tax relief (20%) on the contribution goes direct into the pension plan

For higher/additional rate taxpayers:

  • The basic rate band is extended by the gross contribution providing higher and additional rate tax relief, (which are claimed through self-assessment)
  • Although this is limited to 100% of the individual’s relevant UK earnings

If an £8,000 net contribution is made:

For basic rate taxpayers:

  • This is grossed up to £10,000 within the pension scheme
  • This is the basic rate relief paid into the scheme from HMRC

For higher/additional rate taxpayers:

  • The basic rate band is extended by the gross contribution of £10,000, providing the higher and additional rate tax relief, (which are claimed through self-assessment)
  • This is limited to 100% of the individual’s relevant UK earnings

What are the potential benefits?

  • The more income falling into the extended basic rate band, the less overall tax they will pay
  • The knock-on effect may be lower tax due on realised gains on other investments
  • Therefore an individual’s tax bill is reduced further

What about third party contributions?

Third party contributions are:

  • Not classed as employer contributions (that is, not for employee/ex-employee)
  • Contributions made on behalf of an individual by a third party, for example, a parent making a pension contribution for a child
  • Treated as if the individual had made the contribution Limited to the higher of £3,600 and 100% of the individual’s UK relevant earnings
  • Treated as a benefit in kind if employer makes contributions to an employee’s spouse/family member – no corporation tax relief possible


Planning considerations

Pension contributions can help clients:

  • Build up retirement benefits
  • Utilise carry forward of unused allowances

Pension tax planning can help clients:

  • Reclaim all or part of their personal allowance
  • Reduce all or part of the High Income Child Benefit Tax Charge
  • Reduce the amount of capital gains tax payable on a taxable gain
  • Reduce all or part of any higher rate tax on encashment of an investment bond

This briefing note is also available as a PDF

This information is based on our current understanding of tax law, HMRC practice and legislation as at April 2018 which may change and it should not be considered a definitive statement in law. We are also providing this on the strict basis that it is for your consideration only and that ultimate responsibility for any advice given to your client lies with yourself. Canada Life and Canada Life International Limited cannot be held responsible for the results of any action or inaction the client may undertake.

This website is for UK professional advisers only and is not approved for use by private customers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.