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What are the pension tax perks saving us billions?

Pensions come with attractive tax perks - here’s how to claim your share.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The government encourages people to save for retirement by offering generous tax perks. And the efforts to incentivise pension contributions are estimated to cost around £27.7 billon this tax year. This hefty figure includes the amount of tax relief that pension savers are set to receive, as well as the amount of income tax saved by them holding investments in a pension. Below we explain how these tax perks work.

This article isn’t personal advice. If you’re not sure what’s right for you, please ask for advice. Pension and tax rules can change, and benefits depend on your circumstances. Money in a pension is usually accessible from age 55 (rising to 57 in 2028).

£27.7 billion in income tax

Claim tax relief by adding money to a pension.

How does pension tax relief work?

Whenever you pay into a pension, you’ll get a top up from the government.

As long as you're a UK resident under 75, you can usually pay in as much as you earn, up to £60,000 a year for most people, and get basic-rate tax relief (20%). Even children and other non-earners can contribute up to £3,600 (you pay up to £2,880, the government adds up to £720 in tax relief).

If you pay higher-rate tax (40%), you can claim up to an additional 20% in tax relief through your tax return or local tax office. If you pay additional-rate tax (45%), you can claim back up to an extra 25%.

You must pay enough tax at the relevant rate to claim back the full amount. Different income tax rates and bands apply for Scottish taxpayers.

Basic-rate tax relief example

Let’s say you wanted to pay £1,000 into your pension. You’d only have to pay in £800 and the government would top this up by £200 (20%).

Higher-rate tax relief example

Let’s say you wanted to pay £10,000 into your pension, you’d only have to pay in £8,000 and the government would top this up by £2,000. As a 40% taxpayer you could then claim back up to an additional £2,000 through your tax return.

How much tax relief could you get?

Find out how much tax relief you could get by using our calculator.

All you need to do is confirm your earnings, and how much you’d like to pay into your pension.

How pension investments grow tax-free

A huge tax benefit of a pension is that any investments are free from UK income tax.

Any income made from your investments held outside a tax wrapper (like a pension) are normally subject to income tax. The amount of tax you pay depends on your personal circumstances.

Investment income received outside of a tax wrapper will be added to any other income you’ve received in the tax year. For the 2023/24 tax year, you can normally earn up to £1,000 in dividends tax free. Anything after this is taxed based on your income tax band.

However, from 6 April the dividend allowance is being cut in half to £500.

By holding your investments in a pension, it has the chance to grow free from UK income and capital gains tax.

Pension and tax rules can change, and benefits depend on your circumstances. You can usually access your pension from 55 (rising to 57 in 2028).

Tax year ends 5 April

If you want to secure up to 45% tax relief and save tax for this tax year, you could add money to an HL Self-Invested Personal Pension (SIPP).

But you haven’t got long left to do it because the deadline is 5 April. The sooner you add money to a pension, the sooner you can secure your pension allowances and tax relief for this tax year.

How to top up your SIPP this tax year

Before making any payments, read the SIPP Key Features, including the contribution checklist. Then the quickest way to add money is online or through the HL app.

  1. Log in to your account through the website or with the HL app.

  2. Select your SIPP and under 'Actions', choose 'Top up online' or in the HL app 'Top up'

  3. Follow the instruction to add a contribution with your debit card.

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New to SIPPs?

If you open an award-winning HL Self-Invested Personal Pension, you can look forward to pension tax benefits. As well as getting tax relief, you also benefit from no UK income and capital gains tax.

  • Award-winning service - Best Buy Pension 2023 and 2022 from the Boring Money Awards.

  • Ease - Check your pension anytime online or with the HL app whenever you like.

  • Ongoing support - Get help from our UK-based helpdesk and the answers to your questions no matter how big or small.

  • Security - We're a FTSE-listed company, trusted by 1.8 million clients and regulated by the Financial Conduct Authority.

Before applying, make sure you understand the risks and our terms and conditions (including tariff of charges), plus the key features (including the contribution checklist and important investment notes).

Will tax relief change in the 2024 Budget? – don’t miss out

With rumours swirling around potential income tax cuts, we’ll be keeping a close eye on what changes in the 2024 Budget this week.

To make sure you don’t miss out on what it all could mean for you, sign up to our new ‘Monday Money Matters’ personal finance newsletter.

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Written by
Isabel McDougall
Isabel McDougall
Pensions and Retirement Writer

Isabel specialises in all things pensions. She covers a wide range of topics, including the latest pension news and top tips for retirement planning. She joined HL in 2016 where she first developed her pension knowledge and passion for helping investors save towards their future.

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Article history
Published: 6th March 2024