Tax relief made simple
Your pension comes with all sorts of perks that make it one of the best ways to save for retirement. The money contributed to your pension saving is free from Income Tax and National Insurance, meaning that money that would have gone to the government is instead contributed to your retirement income.
How it works
Your employer can calculate the tax relief on your pension in a couple of different ways.
The net pay arrangement – this is when your contributions are paid directly into your pension before tax has been deducted from your earnings, so you don’t pay tax on them.
Relief at source – this is when your employer takes your pension contributions after your earnings have been taxed, then claims it back on your behalf and pays it into your pension.
How it’s calculated
Tax relief is calculated on how much you earn, which determines how much income tax you pay.
- Basic-rate taxpayers – Those who earn between £12,751 to £50,270 will benefit from 20% of tax relief
- Higher-rate taxpayers - Those who earn between £50,271 to £125,140 will benefit from 40% of tax relief
- Additional-rate taxpayers - Those who earn over £125,141 will benefit from 45% of tax relief
So, if you’re a basic-rate taxpayer, your tax relief is worked out at 20 percent, if you’re a higher-rate taxpayer it’s 40 percent, and so on.
The more you contribute to your pension, the more tax relief you’ll benefit from. Can you afford to contribute more? Click here to find out
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