Tax on Your Private Pension Contributions

A private pension is a plan funded by individual contributions, typically made through earnings, which then pays out after retirement.

1. Overview

Contributions to private pensions can qualify for tax relief, up to specific limits. This applies to most private pension schemes, including:

• Workplace pensions
• Personal and stakeholder pensions
• Recognised overseas pension schemes eligible for UK tax relief (check with your provider if it qualifies)

You may need to pay tax when you withdraw funds from a pension.

Private Pension Limits for Tax-Relief Contributions

You can usually contribute tax-free up to:

• 100% of your earnings in a tax year (for tax relief purposes)
• £60,000 per year (as of April 2023), which is your annual allowance
• Contributions exceeding these amounts may result in a tax charge.

If your provider isn’t registered with HMRC or doesn’t invest your pension pot according to HMRC’s rules, your contributions might also incur tax.

2. Tax Relief on Private Pension Contributions

You can get tax relief on private pension contributions worth up to 100% of your annual earnings. This relief is applied in the following ways:

• Employer Contributions: Tax relief is automatic when workplace contributions are taken out of your pay pre-tax.
• Personal Contributions: For personal pensions and some workplace pensions, your provider claims tax relief at a basic rate of 20% and adds it to your pot (known as “relief at source”).

It’s important to make sure that tax relief doesn’t exceed 100% of your annual earnings, as HMRC may reclaim any excess.

Claiming Additional Tax Relief

In certain situations, you may need to claim additional tax relief:

• Higher Rate Taxpayers (40% rate): Claim the extra 20% in your Self-Assessment tax return.
• Additional Rate Taxpayers (45% rate): Claim the extra 25% in your Self-Assessment tax return.

If someone else (e.g., a partner) pays into your pension, they receive tax relief at 20%, provided it’s a “relief at source” scheme.

Even if you don’t pay income tax, you can receive basic tax relief on the first £2,880 you contribute each tax year, bringing the total to £3,600 after relief.

3. Annual Allowance

The annual allowance is currently £60,000, increased from £40,000 in April 2023. You may face a tax charge if your pension savings exceed this amount in a tax year.

Carry Forward Unused Allowances

You can top up your current year’s allowance with unused annual allowance from the previous three years. This is called carry forward and is useful if you have high earnings or receive a windfall in a particular year.

Money Purchase Annual Allowance (MPAA)

If you’ve accessed any pension funds (e.g., through drawdown), your annual allowance reduces to £10,000 for contributions to defined contribution pensions. This change is triggered in the first full tax year after you take money from your pension.

4. Tapered Annual Allowance for High Earners

From April 2023, the tapered annual allowance applies if both of the following conditions are met:

• Your threshold income (income excluding pension contributions) is above £200,000.
• Your adjusted income (including pension contributions) exceeds £260,000.

For every £2 that adjusted income exceeds £260,000, your annual allowance drops by £1, with a maximum reduction of £30,000, meaning the allowance could be as low as £10,000.

5. Lifetime Allowance Abolished

The lifetime allowance (LTA) was abolished in the 2023-24 tax year, meaning no additional tax is charged on pension pots above the former £1.073 million threshold. However, the maximum tax-free cash remains capped at £268,275, equivalent to 25% of the previous LTA.

6. Taxation on Withdrawals and Exceeding Allowances

If your contributions exceed the annual allowance, the amount over the allowance will be added to your taxable income, and you’ll pay income tax at your highest rate on this excess.

Upon reaching retirement or accessing your pension, 25% of your pot can generally be taken as a tax-free lump sum. The remainder is subject to income tax, depending on your income tax band.

7. Protecting Your Lifetime Allowance

Although the lifetime allowance charge no longer applies, it’s essential to ensure you’re using pension protections appropriately if applicable to your situation.

If you have “enhanced” or “fixed” protections, make sure you don’t breach their conditions (e.g., by making new contributions) or you could lose these protections. Speak to a tax or pensions professional for more guidance if needed.

How We Can Help

For personalised advice on your pension, annual and tapered allowances, or help with self-assessment, please contact us for further assistance.

Disclaimer: This guide provides general information on UK private pensions and associated tax rules. Always consult with a financial advisor or tax professional for advice specific to your circumstances.