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How tax relief on personal pensions works

For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. These rules are likely to change in 2012. You should follow the link below to find out more.

• Download 'Contracted-out pensions' booklet (PDF, 327K)

• Help with PDF files

If you pay a higher tax rate

If you're on the higher tax rate of 40 per cent, you can get 40 per cent tax relief on your contributions. This relief is only available up to the amount of your income that is taxable at 40 per cent. But the way that the money is given back to you is different:

• Contact details for all Tax Offices Opens new window

Can non-taxpayers get tax relief?

If you don't pay tax, the most you can pay in with tax relief is £2,880 a year. But you'll still get basic rate (20 per cent) tax relief. In other words the government will 'top up' your contribution to make it £3,600.

• More about low income and pensions Opens new window

Limits on pension tax relief

You can save as much as you like into any number of pensions and get tax relief on contributions of up to 100 per cent of your earnings each year, provided you paid the contribution before age 75 and subject to an 'annual allowance'.

For the tax year 2009-2010 this is £245,000 and for the tax year 2008-2009 it was £235,000. (Savings above the annual allowance and a separate 'lifetime allowance' will be subject to tax charges).

Under changes announced in the 2009 Budget, from April 2011 the amount of tax relief will reduce if your income is £150,000 or more. Restrictions were introduced from 22 April 2009 to stop people making large additional pension contributions and getting full tax relief ahead of April 2011. The restrictions will apply to you if all of the following apply:

• your total pension savings are more than £20,000 (or more than £30,000 in certain circumstances)
• you change the amount of your normal regular pension savings
• your income is £150,000 or more (from 8 December 2009 this reduced to £130,000 or more under changes announced in the 2009 Pre-Budget Report)
  

• Pension rules from April 2006

• Changes to tax relief on pension contributions Opens new window

• Pensions: Special annual allowance charge Opens new window

Other tax advantages

There are more tax advantages to having a pension scheme:

Pension fund growth

Your pension fund will invest the money you save (including the tax relief amount) in your pension. Your pension fund growth may be free of tax.

Capital gains tax

Any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains and is tax-free.

Withdrawing funds as a retirement lump sum

When you come to take benefits you may be able to draw out up to a quarter of the value of your stakeholder or personal pension fund as a tax-free lump sum. Your pension provider will be able to tell you whether or not you will be able to do this.

• Options when you take your personal pension

If you want to put money into someone else's personal pension

You can put money into someone else's personal pension – like your husband, wife, civil partner, child or grandchild's. They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill. If they've got no income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief).

For example, if you put £80 into a spouse or civil partner's pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same. These rules are likely to change in 2012. You should follow the links below to find out more.

• Passing money to your children and grandchildren (money, tax and benefits section)

• Download 'Contracted-out pensions' booklet (PDF, 327K)

• Help with PDF files

More useful links

• Understanding the basic State Pension

• Choosing and using a pensions adviser