As a result of workplace pension auto-enrolment, more and more contractors are saving towards a pension. One of the benefits of saving into a workplace pension is tax relief. The way it is given differs depending on the pension scheme you are enrolled into. Continue reading to discover how tax relief on your pension contributions works.
What is pension tax relief, and who is eligible?
When you make contributions into a workplace pension scheme, the government usually gives you a top-up as a way of encouraging you to continue to save for your future and retirement. This comes in the form of tax relief.
You could be eligible for tax relief on your pension contributions if:
- You are a UK resident
- You are under 75 years of age
- You make a gross contribution of up to the higher of 1) your relevant UK earnings or 2) A £3,600 gross contribution which equates to £2,800 as a net figure to your pension pot
How much tax relief do I get?
Tax relief is available on your pension contributions at the highest rate of income tax that you pay:
- You are not eligible for pension tax relief if your income is below the personal allowance threshold – unless you are enrolled in a relief at source pension scheme.
- Basic rate taxpayers are eligible for 20% pension tax relief
- Higher-rate taxpayers are eligible for 40% pension tax relief
- Additional-rate taxpayers are eligible for 45% pension tax relief
Pension tax relief for Welsh taxpayers
Welsh income tax came into effect from the 6th of April 2019. However, for the 2021/22 tax year, the tax relief on pension contributions is shown above, as the tax rates are the same as those of the rest of the UK (excluding Scotland).
Pension tax relief for Scottish taxpayers
Pension tax relief is applied differently to Scottish taxpayers due to the different tax rates and has the following effect on the two arrangements:
Net pay arrangements: tax relief is given immediately at your marginal rate of tax – that is, 0%, 19%, 20%, 21%, 41% or 46%.
Relief at source arrangements: non-taxpayers and basic rate taxpayers are eligible for tax relief at the basic rate of 20%. Individuals who pay the starter income tax rate at 19% will get tax relief at 20% on personal contributions.
Taxpayers paying 21%, 41% or 46% can claim additional tax relief in the same way as those in the rest of the UK.
Types of pension tax relief
There are two ways to get tax relief on your pension contributions. If you are unsure which arrangement your workplace pension uses, always check with your pension provider or employer.
Net pay arrangements
Your pension contributions are deducted from your salary by your employer before tax is calculated. You only pay tax on your earnings that are left. This means you get tax relief on the amount immediately, regardless of whether you pay tax at the basic, higher or additional rate. You will not be eligible for tax relief if you do not pay tax because your earnings are below the threshold. The amount you see on your payslip is your pension contribution plus the tax relief.
Relief at source
Your employer (e.g. your umbrella company) takes your pension contribution after taking tax and National Insurance Contributions (NICs) from your salary. Your pension provider then claims the basic rate tax relief from HMRC and adds it to your pension pot.
You may be able to claim money back if:
- You are a higher or additional rate Income Taxpayer
- You are a higher or top rate Income Taxpayer in Scotland
With a relief at source arrangement, the amount you see on your payslip is only your pension contribution; it does not include the tax relief.
You could benefit from salary sacrifice
Some umbrella companies will offer their employees a pension salary sacrifice scheme alongside their workplace pension scheme. Salary sacrifice is a very tax-efficient way to save for retirement. This is because while an employee’s contributions into a workplace pension scheme usually attract tax relief (provided they are a UK taxpayer), they do not usually attract NIC relief.
With a salary sacrifice scheme, you agree to give up a percentage or fixed amount of your salary in return for your employer making a more significant contribution to your personal pension pot. Not only are you increasing the amount you allocate to your pension each time you are paid, but salary sacrifice pension contributions are also not eligible for tax or NICs. Additionally, as your salary is being reduced to increase your pension contributions, the tax and NIC you would be due to pay are calculated on a smaller salary – saving you money as less tax and NIC is due.
Did you know Umbrella Company UK offers a salary sacrifice service?
If any of the following points apply to you, salary sacrifice could be a great way to save for retirement and increase the amount you contribute to your savings each time you’re paid:
- You are a high earner
- You want to increase your pension contributions
- You’re planning on retiring soon
- You have additional sources of income or disposable income
- You are happy with a reduction in your weekly/monthly salary (as you’ll be allocating more of it towards your pension)
If you would like more information about our salary sacrifice service or to request a tailored take home pay illustration, please complete the short form on our website. Alternatively, please give our friendly team a call on 01707 669023.