The government encourages you to save for your retirement by giving you tax relief on the contributions that you pay into a pension scheme. You receive tax relief on your contributions at the time they are deducted from your pay. Your tax is calculated on your pay less your pension contributions.
HM Revenue and Customs (HMRC) rules govern:
- the total amount of contributions you can make into all pension arrangements and receive tax relief, and
- the pension savings you can have before you become subject to a tax charge.
There is no overall limit on the amount of contributions you can pay to all schemes. However, tax relief is only given on contributions up to the sum of 100% of your taxable earnings in a tax year (or £3,600 if greater).
Most people will be able to save as much as they wish with full tax relief as their pension savings will be less than the allowances.
Lifetime and annual allowances
There are 2 main allowances for pension savings:
- Lifetime Allowance. This is the total capital value of all your pension arrangements which you can build up without paying extra tax. It does not include State Pension.
- Annual Allowance. This is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge.
The lifetime allowance and the annual allowance cover any pension benefits you may have in all tax registered pension arrangements, not just this scheme. It excludes the State Pension.
For further information, visit the HMRC website.
Lifetime allowance protections
The government introduced protections for those that may be affected by the lifetime allowance: