The United Kingdom (U.K.) government encourages you to save money for your retirement while you are working by giving pension tax relief on contributions. There are no limits on how much you can contribute to a U.K. pension although there are limits on the amount of pension tax relief. This is known as an annual allowance. For the U.K. tax year, April 6, 2010 to April 5, 2011 the annual allowance is £255,000. If your pension contributions exceed this amount then you pay tax at 40 per cent on contributions over the annual allowance.
You can claim pension tax relief at the U.K. basic rate (20 per cent as of April 6, 2010) on contributions equating to 100 per cent of your annual earnings so long as you contribute prior to reaching age 75.
There are different ways to claim pension tax relief, depending on the type of pension scheme you contribute to.
Check your paystub to determine your income, net of income tax. This figure is used to deduct your pension contributions at the rate you have agreed.
Find the amount deducted from your paystub attributable to your pension contribution. This can usually be found under "deductions." The amount deducted is transferred to your pension provider. Your pension provider will claim pension tax relief from the U.K. government at the basic rate of tax (20 per cent as of April 6, 2010). For example a pension contribution of £160 will mean your pension provider will claim pension tax relief of £40 on your behalf.
Check if you are paying higher rate income tax. This will be shown on your paystub. Claim additional pension tax relief at your higher rate of tax on your annual tax return.
Check your paystub: it will detail how much you have contributed to your pension and the amount of pension tax relief.
Check the method of pension contribution deduction your employer uses. It can be deducted before or after tax and this affects the way pension tax relief is claimed.
Check to see if your pension contribution is deducted before income tax. You will be able to identify this on your paystub. Deducting your pension contribution before tax is usual practice for occupational pension schemes. It means that you get pension tax relief immediately, whatever rate of tax you pay.
Check if your pension contribution is deducted after income tax. If it is, use the steps in the section "Pension Tax Relief on Personal Pensions" to claim pension tax relief.
Check whether your retirement annuity was set up before July, 1988. You can find this information in your pension documents. If it was set up after July, 1988, use the steps in the section "Pension Tax Relief on Personal Pension" to claim pension tax relief.
Claim pension tax relief on your retirement annuity by completing the appropriate section on your annual income tax return if your pension was set up before July, 1988.
Get your income tax return by contacting your local tax office. If you don't usually complete an income tax return then call or write to HM Revenue and Customs and ask for the best way to claim pension tax relief.
Things you need
- Income tax return