Tax relief on pension payments

Pension contributions also offer substantial income tax and national insurance advantages
Malachy McLernon

QUESTION: My employer has enrolled me into a pension scheme. I am a higher rate taxpayer and when I look through the paperwork from the scheme provider it says I can get tax relief on the pension contributions I make via relief at source. Could you explain this to me?

ANSWER: Pension contributions are one of the most significant tax planning opportunities available. Pension tax relief can reduce the taxable profits of the business. At the same time, pension contributions also offer substantial income tax and National Insurance advantages.

When paying into a pension scheme, members of the pension scheme can receive tax relief on contributions they make. This means that money that would have gone to the government as tax goes into your pension instead.

There are essentially two ways you could receive your tax relief; through relief at source or via a net pay arrangement. Relief at source means if you're a basic rate taxpayer, you don't need to do anything to get the tax relief paid into your pension. It will happen automatically. A net pay arrangement means your pension contribution is deducted from your pay before tax is calculated, so it reduces the amount of money you get taxed on.

For those earning more than the personal allowance (currently £11,500 for 2017/18) they don't need to do anything to get the tax relief paid into their pension. The tax relief will happen automatically through the payroll.

If you're a higher or additional rate taxpayer, to get full tax relief you need to claim back some of your tax from the government. This is because tax relief is only added to your pension at the basic rate of 20 per cent.

To get all the tax relief that is due to you, you need to claim back the difference on your annual tax return, or alternatively, if you are a higher rate taxpayer you can contact HM Revenue & Customs.

Pension contributions made by an employee benefit from income tax relief. Tax relief on pension contributions is available for up to 100% of earnings, provided the employee is under 75. Both employer and employee will still pay any national insurance contributions that are due.

Pension tax relief is restricted by an annual allowance of £40,000. There is no tax relief on pension contributions in excess of the annual allowance unless you have unused allowances (up to the maximum £40,000), which you are allowed to carry forward for up to three years.

The way tax relief on pension contributions is given depends on the particular scheme. With occupational schemes, employees' pension contributions are generally paid into the scheme without any tax being deducted, automatically giving pension tax relief at whatever rate of income tax the employee pays.

Pension contributions into a personal pension scheme are made out of the employee's taxed income, with the pension scheme then claiming back basic rate pension tax relief. Individuals who pay higher rates of income tax generally claim the difference back through their own self-assessment tax returns as noted above.

:: Malachy McLernon ( is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

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