Tax Relief

Can I declare pension contributions for tax functions?

Released:
8:00 AM November 30, 2021

I just got a raise and that made me a higher taxpayer, even in the current tax year. In addition to my company pension scheme, I also have a private pension scheme and make regular contributions. I know that I am entitled to a tax reduction on my contributions: How do I get the full tax rate back?

Matthew Hinchliffe, Independent Financial Advisor at Smith & Pinching
– Credit: Smith & Pinch

Matthew Hinchliffe from Smith & Pinching replies:

You are right that pension contributions are tax-relieved, ie that you have the taxes paid on your contributions credited to your fund. For property taxpayers, this usually happens automatically: your pension insurance adds another 20 percent to the fund.

Taxpayers with a higher and an additional tax rate are entitled to full tax breaks of 40 and 45 percent respectively, but only receive the base tax rate of 20 percent automatically added. You must actively claim the additional relief for company and private pension schemes through your self-assessment.

You can get relief in one of three ways: a refund at the end of the tax year; a reduction in your tax bill; or a change in your tax number.

If you are planning to make particularly high contributions, you should consider two main allowances for pensions: the annual allowance and the lifetime allowance.

Tax relief is only possible for contributions up to your annual tax credit. The standard annual tax credit is currently £ 40,000 but there are some instances where your annual tax credit will be reduced.

Firstly, once you have started receiving flexible benefits from your pension scheme it will be reduced to just £ 4,000. This reduced annual allowance is known as the Money Purchase Annual Allowance (MPAA). Second, the annual tax credit may be reduced if you are making particularly good money, but since you are a taxpayer with a higher tax rate and not a taxpayer with an additional tax rate, you are unlikely to do so.

The lifetime allowance (LTA) is the total amount that you can keep across all of your pension schemes without incurring any additional tax burden when you use your benefits or when you reach the age of 75. The LTA is currently £ 1,073,100 and has been frozen through April 2026. If your retirement savings are near that amount, it is important to plan for something.

I recommend seeking independent financial advice to ensure you are managing the tax efficiency of your retirement savings.

Any views expressed in this article are not to be considered advice. The value of your investment can go down as well as up and you may get back less than the amount invested. They are based on the tax year 2021/22 and can change.

More information is available at www.smith-pinching.co.uk

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