Happy 100th birthday pensions tax relief
Tax relief is one of the biggest attractions of saving in a pension. As it celebrates its 100th anniversary in 2021, Aviva explain what pension tax relief is and why it’s such a big deal:
The concept of pensions tax relief was first introduced in the Finance Act of 1921. Then, as now, it’s an incentive to save today for our retirement tomorrow. In short, it means money that would have otherwise gone to the taxman today instead supports your pension.
And it’s a big boost. It’s estimated that the government foregoes approximately £40 billion every year by allowing this money to be channelled towards supporting employer and employee pension contributions 1.
Of course, tax rules are subject to change and depend on your personal circumstances. The tax relief you get on what you pay into your pension depends on a few things: the type of pension; how much you pay in; your highest marginal rate of income tax; and where in the UK you live.
If you’re a basic rate taxpayer, you’ll get tax relief of 20% on your pension contributions. This means that every £100 you pay into your pension is actually made up of just £80 from you and £20 tax relief.
There’s more good news if you’re a higher or additional rate taxpayer. You can claim back the extra tax relief through your self-assessment tax return.
There’s a limit to the amount you can save in a pension without facing a tax charge, to keep a ceiling on how much tax relief costs the government and applies to total pension savings — that is, both your own savings plus any from an employer.
To sum up, while pensions tax relief can get a little complicated in some scenarios, it can be a big boost on top of your savings for the future. If you don’t save in a pension you won’t receive a boost like this from other investments. So, don’t forget to factor in tax relief when you think about the value of your pension to you.
And don’t forget to raise a glass on its 100th birthday !
If you would like more information on pensions centred on your own personal circumstances, please contact us >>