Tax on private pension contributions

Our experts explain how HMRC treat your contributions to private pension funds

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.

Do you have to pay tax on your private pension contributions?

Most private pension contributions are tax-free up to certain limits. This includes most forms of private pension scheme, including workplace pensions, personal pensions, stakeholder pensions and overseas pension schemes which qualify for tax relief.

You do have to pay tax when you take money out of a pension.

What are the limits to tax-free contributions?

You will have to pay tax on your private pension contributions if your pension pots exceed:

  • 100% of your earnings in a year because this is the limit for the tax relief you are entitled to
  • £1 million in your lifetime (known as the lifetime allowance)
  • £40,000 a year (known as the annual allowance)

You will also have to pay tax on your private pension contributions if your pension provider isn’t registered for tax relief with HMRC or fails to invest your pension pot in line with HMRC’s investment rules.

How do you get this tax relief?

You are entitled to claim tax relief on your pension contributions up to 100% of your annual earnings. You get this automatically if your employer takes your workplace pension contributions directly out of your wages before deducting Income Tax, or if your pension provider claims tax relief on your behalf at 20% and adds it into your pension pot (this is called ‘relief at source’).

You get relief at source from all personal and stakeholder pensions as well as some workplace pensions.

It’s your responsibility to make sure you’re not claiming tax relief on pension contributions above 100% of your annual earnings. If you do, HMRC can ask you to repay anything over this limit.

You might have to claim the tax relief yourself if:

  • You pay Income Tax at a rate above 20% and your pension provider claims the first 20% for you as relief at source
  • Someone else pays into your pension
  • Your pension scheme isn’t set up for automatic tax relief.

If you pay Income Tax at 40%, you can claim the extra 20% tax relief through your Self Assessment tax return. If you don’t need to send a tax return, call HMRC on 0300 200 3300 (textphone 0300 200 3319) and they will let you know what you need to do to claim that tax relief.

If you pay Income Tax at 45%, you can only claim the additional 25% tax relief through a Self Assessment tax return.

If your pension scheme isn’t set up for automatic tax relief at source, you need to claim this tax relief through your Self Assessment tax return. You need to call HMRC on 0300 200 3300 (textphone 0300 200 3319) and they will let you know what you need to do to claim that tax relief if you don’t use the Self Assessment service.

If your pension provider isn’t registered with HMRC, you can’t claim this tax relief.

If someone else pays into your pension scheme (for example, your spouse or civil partner), you automatically get tax relief at 20% if it is claimed at source by your pension provider. If your workplace pension allows contributions from other people, you need to call HMRC on 0300 200 3300 (textphone 0300 200 3319) and they will let you know what you need to do to claim that tax relief on those contributions.

What happens if you don’t have to pay Income Tax?

If you don’t have to pay Income Tax for any reason, you will still get tax relief automatically. This will be at 20% for the first £2,880 that you pay into your pension each tax year. Both of the following circumstances must apply though:

  • You don’t pay Income Tax. For example, you might be on a low income, which is below the Personal Allowance threshold.
  • Your pension provider claims tax relief at source for you at a rate of 20%.

Can you get tax relief on Life Insurance policies?

You’re not entitled to tax relief if you use your pension contributions to pay for a personal term assurance policy, unless it is a protected policy. Personal term assurance policies are life insurance policies which either end when the first insured person dies or insures people from the same family.

What is the annual allowance?

If the savings you invest in your pension pot exceed a certain limit in a tax year, you will be expected to pay tax. This annual allowance is currently set at £40,000.

You are allowed to top up your current allowance for the current tax year with any allowance you didn’t use in the previous 3 years. Between 6th April 2011 and 5th April 2014, this allowance was £50,000 per year. The 2015/16 tax year was the split into 2 with different tax-fee allowances, as follows:

Period Annual allowance
6th April 2015 to 8th July 2015 (known as the ‘pre-alignment tax year’) £80,000
9th July 2015 to 5th April 2016 (known as the ‘post-alignment tax year’) £0

 

You can carry over up to £40,000 of unused allowance from the pre-alignment year to the post-alignment year. You can also add this to any unused allowance from between 6th April 2014 to 5th April 2017. For the 2016/17 tax year, the annual allowance limit was £40,000. You can check if you’re not sure if you have used all your annual allowances.

Lower allowances if you take money from your pension pot

In certain circumstances it is possible to keep paying into a pension pot after you’ve taken money out of it. You will have to pay tax on any contributions over £4,000 per tax year. This is because your annual allowance drops to £4,000 for all defined contribution schemes you are in, in the first full tax year after you take money from the pension pot. This lower allowance is sometimes called a ‘money purchase annual allowance’. This lower allowance can’t be topped up with unused allowance from previous tax years. For the pre-alignment year, this money purchase annual allowance is £20,000. The post-alignment year doesn’t have a money purchase annual allowance but you can carry over £10,000 from the pre-alignment year.

Withdrawals that can affect your annual allowance

There are certain types of withdrawal you can make from a defined contribution scheme which will cause your annual allowance to drop. These withdrawals are:

  • Cash from a pension pot (known as ‘uncrystallised finds pension lump sums)
  • More than the allowed limit from a capped drawdown fund
  • Cash or a short-term annuity from a flexi-access drawdown fund

There are other situations that may cause it to drop to £4,000. If this happens, your pension provider will send you a flexible access statement.

If your allowance drops to £4,000 in one of your pension pots, you must inform all the other pension schemes you’re in within 13 weeks.

If you go over the lower allowance

If you go over this lower allowance, your annual allowance in all your other pension pots also drops to £36,000 for all the defined benefit schemes you are on. You’re allowed to top this up with any unused allowances from the 3 previous tax years.

Are allowances reduced for higher incomes?

If both the following apply, you will have a reduced (or tapered) allowance from April 2016:

  • Your ‘threshold income’ is over £110,000. This is your income excluding any pension contributions (unless they form part of a salary sacrifice scheme with your employer)
  • Your ‘adjusted income’ is over £150,000. This is your income added to any pension contributions made by you or your employer.

How do you check how much annual allowance you have used?

You will need your pension statements to work out how much of your annual allowances you have used. If you don’t receive pension statements automatically, you can ask your pension provider to send them to you.

You need to check the ‘pension input periods’ that ended during the tax year. You then work out how much annual allowance you used in those periods. What can count towards your allowance depends in the kind of pension scheme you are in.

You do this for all the pension schemes you are in. The total from all these schemes is how much annual allowance you have used. Pension Input Periods now run for a tax year (6th April to 5th April the following year).

The following table shows what counts towards the annual allowance for each type of pension scheme:

Type of pension scheme What counts towards the annual allowance
Defined contribution schemes (personal, stakeholder, most workplace schemes) Total amount of contributions paid in by you or anyone else (including your employer or government)
Defined benefit schemes (some workplace schemes) Any increase in the amount your pension provider promises to give you when you retire
Hybrid pension schemes Whichever is higher from the total contributions or the increase in the amount your pension provider promises to give you on retirement

 

How do you pay tax if you have gone over the allowance?

Your pension provider will send you a statement if you go over your annual allowance. If you are in more than one scheme, you will then need to ask the rest of your pension providers to send you a pension statement so you can work out how much over the allowance you have gone.

You then declare this information in your Self Assessment tax return. Use the ‘Pension savings tax charges’ to report this to HMRC. HMRC will then use your Self Assessment tax return to work out how much tax you will have to pay as a result. You can still claim tax relief for your pension contributions even if you have gone over the annual allowance.

HMRC won’t charge tax if an annual allowance has been exceeded if the pension holder retired and took all their pension pots because of serious ill-health or because they died.

If you owe more than £2,000, you can ask your pension provider to pay HMRC out of your pension pot. You need to tell your pension provider before 31st July if you need them to pay the tax for the previous tax year. You will still need to complete and send a Self Assessment tax return though.

The amount by which you went over your annual allowance will be added to the rest of your taxable income and will then be taxed at the usual Income Tax rates that apply to you.

What is the Lifetime Allowance?

If your pension pots are worth more than £1 million, this means they are worth more than the Lifetime Allowance amount and you will usually be expected to pay tax. You might be able to protect your pension pot from these reductions.

You can ask your pension provider to check how much of your lifetime allowance you have used. This lifetime allowance applies across all the pension schemes you belong to, so if you belong to more than one, you will need to ask all your pension providers to check this for you and then add up how much you have used in each pension scheme.

What counts towards your allowance depends on the kind of pot you belong to

Type of pension scheme What counts towards the lifetime allowance
Defined contribution schemes (personal, stakeholder, most workplace schemes) Money in the pension pot that will go towards paying you, however you decide to take that money
Defined benefit schemes (some workplace schemes) Usually 20 times the pension you get in the first year plus your lump sum.

 

Your pension provider can ask you to provide them with information about the other pension schemes you belong to so they can check whether you are above your lifetime allowance if you decide to take money from your pension pot, turn 75 or transfer your pension overseas.

If you go over your lifetime allowance, your pension provider will deduct the tax before you start getting your pension. They will also send you a statement telling you how much tax you owe as a result. You will need to report this on your Self Assessment tax return. If you die before you take your pension, HMRC will send a tax bill to the person who inherits your pension.

How much tax you have to pay depends on how the money is paid to you. If you get it as a lump sum, it is 55%. It is 25% if you get the money in any other way, for example, as pension payments or cash withdrawals.

This lifetime allowance was reduced in April 2016. You can apply to reduce your lifetime allowance from this reduction if you or your employer haven’t added to your pension savings since 5th April 2016, or you had opted out of any workplace pension schemes by this date. You need to apply using an online HMRC account.

If you have a defined contribution pot (also known as ‘uncrystallised funds pension lump sums’), you can’t withdraw cash if you have primary or enhanced protection or a ‘lifetime allowance enhancement factor’.

Reporting changes to HMRC

You can lose your protection if any of the following apply:

  • You make new savings in a pension scheme
  • You transfer savings between pension schemes in a way that breaks transfer rules
  • You are enrolled in a new workplace pension scheme
  • You have enhanced protection and when you receive your pension benefits, they have increased in value by more than is allowed in the enhanced protection rules
  • You have fixed protection and the value of your pension pot in any given tax year grows at more than the allowed rate.

You need to report these changes to HMRC, either online or by post. If you think your employer is likely to enrol you in a workplace pension scheme, you can ask to opt out. If you think you have lost your protection, you also need to inform HMRC.

If you are allowed to take your pension at 50

If you have the right to take your pension at 50, this could reduce your lifetime allowance. This applies to pension schemes you joined before 2006. This only applies to people in certain jobs who start taking their pension before 55. If you’re in a pension scheme for uniformed services (such as the armed forces, police or fire service), this reduced lifetime allowance doesn’t apply to you.

How can DSR Tax Claims help?

We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful.  Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

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