Pension contributions and tax relief

If you want to make a contribution into a pension you need to consider four things:

1. The Annual allowance

The annual allowance is the amount of tax relievable contributions that can be paid into a pension each tax year without there being a tax charge. Normally the annual allowance is £60,000 but it can be lower if you have a tapered annual allowance or have triggered the money purchase annual allowance.

Prior to age 75, investor, employer and 3^rd party contributions all count towards the annual allowance. After age 75 only employer contributions count towards the annual allowance.

If contributions are made above the annual allowance and there is no carry forward available, there will be an annual allowance tax charge.

2. Carry forward

Unused annual allowance from the three previous tax years can be added (carried forward) to the current tax year’s annual allowance.

You can only carry forward from a previous tax year if you were a member of a registered pension scheme for at least part of that year.

If you have triggered the money purchase annual allowance, carry forward is not available for contributions paid into money purchase schemes.

3. Relevant UK earnings

Personal contributions are entitled to tax relief whether they are paid by:

• The investor
• A 3^rd party
• A partnership account
• A sole trader account

Tax relief is given via three different methods:

• by deducting from gross income before tax is paid (net pay)
• by making a gross payment and claiming money back from HMRC directly (claims) or
• by having tax relief added to your pension (relief at source).

This article is focused on the relief at source method.

You are entitled to tax relief at your marginal rate on the higher of £3,600 or 100% of relevant UK earnings for the tax year you are contributing in. For most people, relevant UK earnings will mean their salary. Other income such as income from dividends, rental income and the first £30,000 of a redundancy payment are not classed as relevant UK earnings.

Tax relief (via relief at source) is given by the scheme claiming the basic rate of tax from HMRC and adding it to your pension. If you are a higher or additional rate payer, you will normally claim the extra tax relief via self-assessment. Because tax relief is limited to payments up to your relevant UK earnings most schemes will only accept contributions up to this limit.

It is possible to make a gross personal pension contributions that doesn’t get tax relief so that you can contribute more than your relevant UK earnings, but in practice it may be hard to find a provider willing to accept this type of contribution. Quilter will not accept contributions on this basis. If you pay more than your relevant earnings to Quilter you should ask for a refund of the excess after the end of the tax year in which the contribution(s) have been made by using this form.

Don’t confuse unused annual allowance from a previous tax year with unused relevant UK earnings from a previous year. There is no such thing as unused relevant UK earnings so they cannot be carried forward. It is unused annual allowance that is carried forward. The only relevant UK earnings that matter when contributing are your earnings for the tax year you are making the contribution in. So if you are contributing in the 2023/24 tax year, the only earnings that matter is what you earned in the 2023/24 tax year, even if you are using carry forward from the three previous tax years.

4. Employer contributions

Employer contributions do not receive tax relief in the pension. As no tax relief is given, the employer contribution is not limited to the employee’s earnings like personal contributions.

However, if the employer pays in more than its employee’s annual allowance and carry forward, the employer will cause a tax charge for the employee. This is because all employer contributions (no matter the age of the employee) will count towards annual allowance.

An employer may be able to reduce the company’s tax bill by making a pension contribution, if it is an expense that is wholly and exclusively for the purpose of the business. The employer may want to limit their contribution to the amount they can claim as an expense. For more details please read our employer contribution article.

Examples

Below are some examples that should help bring the rules to life. The assumption for the below examples is that the annual allowance is £60,000 and the salary is the total relevant UK earnings.