Making a pension contribution for family members can produce a 90% tax saving

Making a pension contribution for family members can not only reduce your estate for inheritance tax purposes but can also attract tax relief on those pension contributions. In one scenario, this could generate a 90% tax saving according to Canada Life, who crunched the numbers.

Any contribution from one individual to another family member is treated as if it is the member’s own contribution into their pension. This means not only will you reduce the value of your estate for inheritance tax purposes – for example reducing your estate by making a gift of £32,000 could save £12,800 in IHT further down the line – but each contribution into your family member’s pension will also attract tax relief.

If you are considering making gifts in a pension on someone else’s behalf, you need to be aware of certain restrictions. Any gifts you make will normally be treated as Potential Exempt Transfers (PETs), the recipients will need to have sufficient relevant earnings to cover the size of the contributions made and will be subject to the recipient’s pension annual allowance limit, which is normally £40,000.

There are certain exemptions available, for example the £3,000 annual IHT exemption with a carry forward of any unused amount from the previous tax-year. You can also gift from surplus income; gifts must be regular and affordable payments out of normal income without relying on capital to maintain your standard of living. The benefactor also needs to live for seven years following the gift for it to be outside their estate.


Andrew Tully, technical director at Canada Life commented:

“Making lifetime gifts to family members by way of pension contributions is a little-known area of flexibility within the pension system, but from a tax perspective, is hugely efficient. Not only will the benefactor potentially reduce their inheritance tax liability, but the beneficiary will see immediate benefit from tax-relief on the pension contribution at their highest marginal rate.


“There are other benefits to consider apart from the obvious investment in the pension, including the ability to reduce the tax on other income. Higher earners can potentially regain their personal allowance if their income falls below £100,000, and you can even reduce or eliminate the High Income Child Benefit Tax Charge. Both increase the tax efficiency of the gift.


“As ever, with areas of personal tax and pensions, it is always wise to seek professional financial advice to ensure you don’t fall foul of the rules.”


So how do the figures add up?

It all depends on the value of the benefactor’s estate and the tax status of the beneficiary or multiple beneficiaries.


For example, if a benefactor’s state was likely to be liable for inheritance tax and the recipient is a higher-rate taxpayer then a gift of £32,000 would reduce the potential IHT liability by £12,800 (40% of £32,000) and generate £16,000 in pensions tax relief (£8,000 going into their pension and £8,000 in higher-rate relief through self-assessment). This generates a total tax relief of 90% on the original gift.


Gift Value

IHT saving / tax relief on pension contribution at recipient’s tax rate

Total tax saving on gift

Pension contribution

£32,000 to a higher rate beneficiary

£12,800 @ 40% / £16,000 @ 40%

£28,800 / 90% of gift value



£32,000 to a lower rate beneficiary

£12,800 @ 40% / £8,000 @ 20%

£20,800 / 65% of gift value



Source: Canada Life. Assumptions: whole gift would be liable to IHT. Gift will be a Potentially Exempt transfer unless benefactor donor can use annual exemption, or gift from income without affecting standard of living. Benefactor lives for seven years following gift. Recipients are able to pay £40,000 into pension.