Making pension contributions into a private pension is something many people will do in order to prepare for their retirement. How much one chooses to contribute to their pension is down to them, however there is a limit on what amount will be tax-free. Currently, a person may be able to get tax relief on private pension contributions with up to 100 per cent of their annual earnings. However, there is a limit on this, such as the annual allowance.
This is the amount of money which a person can save in pension pots during one tax year (April 6 to April 5) before having to pay tax.
In this tax year, that figure stands at £40,000.
Tax is only payable on the pension contributions on the portion which may exceed this allowance.
Should a person have used all of their annual allowance this tax year, but not used all of their annual allowance in the previous three tax years, they may be able to carry it over.
The annual allowance may be reduced from this amount for a number of reasons, such as if one has flexibly accessed their pension pot, or have a high income.
Another limit is the lifetime allowance.
The lifetime allowance for tax on pension contributions is currently £1,055,000.
This means that one would usually pay tax if their pension pots are worth more than the lifetime allowance.
However, it may be that one can protect their pension pot from reductions to the lifetime allowance, as the Gov.uk website points out.
The Pension Advisory Service explains that people who don’t have any earnings, or who earn less than £3,600 each tax year, can also receive tax relief on gross contributions of up to £3,600 each year to a personal pension, a self-invested personal pension, or stakeholder pension reviving basic rate income tax relief, at currently, 20 per cent on the contribution.
An individual in this situation can make greater contributions should they wish to, but they won’t be able to receive the tax relief on this portion above the limit.
“You can pay in higher amounts than your maximum limit, but you don’t receive tax relief on the excess amounts,” the website states.
“It’s good to remember that you may have to repay any tax relief that you have received from HMRC on these excess contributions.
“You also don’t receive tax relief on any payments that your employer pays into your scheme.”
While Inheritance Tax may not always be payable, it may be that Income Tax is deducted by the provider.