Are you worried about your pension fund? Retirement is a daunting prospect, and saving for the future should always be a top priority. Today, SimpleTax will explain the basics about pension tax relief; how does it work and what are the limits?
Today, the Government actively encourages you to save money for your retirement, by offering a tax relief on all pension contributions. Basically, contributing to your pension fund will result in two things:
- Your pension fund increases
- Your tax bill decreases
It’s a win-win situation, to a point…
How does it work?
How you receive tax relief is dependent on the type of pension scheme you pay contributions to:
Occupational or public service pension scheme – This is, by far, the easiest way to contribute to your pension fund. Usually, your employer will take pension contributions from your pay packet before any tax is deducted, and you can sit back and watch your pension fund grow.
Personal pension – With personal pensions, you pay tax on your earnings before you make a contribution, but your pension provider then claims back from the Government at the basic rate of 20%. For example, this means that for every £80 you pay into your pension, you will end up with £100 in your pension fund. If you’re on the higher rate, you can claim the difference through your tax return or by contacting HMRC.
If you’re an exceptional case and you don’t pay tax, you can still contribute to a pension scheme and you can still benefit from a 20% tax relief on the first £2,880. This means that the Government will contribute 20%, making it £3,600 in total!
Limits on pension tax relief
There is no limit to the amount of money you can put into any number of different pension schemes, and you will benefit from tax relief on these contributions. However, your tax relief is subject to an annual allowance. Basically, this means that your relief is capped at a number, and the moment your savings go above this number, then you must pay tax on it.
So, you can save as much as you like towards your pension fund, but the moment your savings go above your annual allowance, you stop receiving tax relief (the maximum amount you can save whilst still benefiting from tax relief is called your annual allowance). If you are saving in a registered pension scheme then your annual allowance for tax year 2016/2017 is £40,000. If you save more money than this, you may have to pay a tax charge on the excess.
Paying contributions to your pension can both reduce your tax bill and set you up for the future. This is just one of many tax reliefs that we at SimpleTax want you to benefit from. Now, everyone can manage their money like an expert; Go SimpleTax
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