Tax Relief on Pensions: how to build a bigger pension pot

Guest blog by Adriana Lockman, Founder of Isamor

Please remember that a pension is a long-term investment, the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Tax advice is not regulated by the Financial Conduct Authority. 

Did you know that if you’re under 75 and have relevant UK earnings, you can benefit from tax relief when contributing to a personal pension or workplace pension scheme within the annual allowance? Read this blog to learn all about building a bigger pension pot and tax relief available in 2024-2025.  

How does tax relief on pensions work? 

The government provides basic rate tax relief of 20% through ‘relief at source,’ which is claimed by the pension provider from HM Revenue & Customs (HMRC). For instance, if you invest £8,000 in your pension, the government adds £2,000, making your total contribution £10,000. 

Higher and additional rate taxpayers can also reclaim further tax relief on their pension contributions. In the 2024/25 tax year, the higher rate tax starts at £50,271 of income per year, while the additional rate begins at £125,141. The tax rates for earned income at these levels are 40% and 45%, respectively. 

This means that higher and additional rate taxpayers can reclaim an extra 20% or 25% on their pension contributions. Using the previous £10,000 example, these taxpayers may be eligible for an additional refund of up to £2,000 or £2,500, respectively. 

How can I claim this relief?  

We’ve listed the steps you should follow below: 

1. Contribute to a pension scheme 

Ensure you’re contributing to a registered pension scheme through your employer or a personal pension plan. 

2. Check if you receive tax relief automatically 

If you’re part of an occupational workplace pension scheme, your employer might already deduct your contributions from your salary before applying tax. In this case, you’ll automatically receive tax relief at your highest Income Tax rate.  

If your pension plan, workplace or not, is a personal pension, you will usually make your contributions from after-tax income but net of 20% basic rate relief. Any higher rates of relief need to be claimed from HMRC.  

If your contributions are made using salary sacrifice, you won’t need to claim any tax back as this is given to you automatically.  

3. Claim additional tax relief through Self-Assessment 

If your pension provider claims tax relief for you at the basic rate, and you’re a higher rate taxpayer, you’ll need to claim the additional tax relief through a Self-Assessment tax return (or tax code adjustment). Register for Self-Assessment on the HMRC website and complete the form annually, declaring your pension contributions. 

4. Adjust your tax code 

If you don’t want to file a Self-Assessment tax return, you can contact HMRC to adjust your tax code to claim higher rate relief (but not additional rate relief). Provide them with details of your pension contributions and relevant information about your income. They’ll update your tax code, and you’ll receive the additional tax relief through your PAYE (Pay As You Earn) system. 

Need specific guidance on your retirement planning situation? 

Remember, tax rules can change, and individual circumstances may vary. It’s always a good idea to consult experts for specific guidance, which is exactly what we’re here for. To tell us about your situation or for advice, don’t hesitate to contact us.