Tax relief on pension contributions – member

Learn why personal contributions are made, different methods for attracting tax relief and some tax planning opportunities.

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

What 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 (for example pay, wages, bonus, over time 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 (through 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; and

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 individuals relevant earnings

If an £8,000 net contribution is made:

For basic rate taxpayers:

  • This is grossed up to £10,000 within the pension scheme
  • £2,000 is the basic rate relief paid into 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 individuals 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 (for example 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 individuals relevant UK 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 Child Benefit High Income Charge
  • Reduce the amount of Capital Gains Tax (CGT) 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 document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at April 2023 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.