With investment, your capital is at risk. Taxation depends on individual circumstances. Tax rules may change.
Pension tax relief
Investments in pensions grow free from income tax and capital gains tax.
The Government also gives you tax relief on pension contributions up to your annual allowance (more on the annual allowance below). Anything you invest will be topped up by 20% automatically.
Higher-rate taxpayers can claim back another 20% through their self-assessment tax returns. Additional-rate taxpayers can claim back another 25% through their self-assessment tax returns.
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.
Pension contribution
The following shows the cost of a £10,000 pension contribution for the three people paying different tax rates
| Basic rate tax payer (investor contribution: £8,000) | Higher rate tax payer (investor contribution: £8,000) | Additional rate tax payer (investor contribution: £8,000) |
| Government contribution: £2,000 | Government contribution: £2,000 | Government contribution: £2,000 |
| Tax return reclaim: £0 | Tax return reclaim: £2,000 | Tax return reclaim: £2,500 |
| Total tax relief: £2,000 (20%) | Total tax relief: £4,000 (40%) | Total tax relief: £4,500 (45%) |
| Total cost to the investor: £8,000 | Total cost to the investor: £6,000 | Total cost to the investor: £5,500 |
Pension allowances
The pension annual allowance
You can pay as much as you want into a pension every year but there are limits to the amount of tax relief you will receive. This is known as your annual allowance.
Every year you can contribute as much into your pension as you have earned, usually up to a maximum of £60,000. If you go over your allowance there will be a tax charge.
This £60,000 annual pension allowance is tapered down for higher earners. This is known as the tapered annual allowance.
The allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000 (although the rules over what constitutes adjusted income are complex!).
Pension carry forward
Under pension carry forward rules you can make pension contributions above your annual allowance. You do this by using any unused allowance from the last three tax years. You need to use all of your current annual allowance first, and then you can carry forward your allowances starting with the earliest of the three years. The contribution can be no more than 100% of earnings.
Pension carry forward – an example
The investor is in their 40's. They currently earn £180,000 a year and have made the following pension contributions over the last few years:
| Pension contribution | Unused Allowances | |
| 2021/22 | £20,000 | £20,000 |
| 2022/23 | £10,000 | £30,000 |
| 2023/24 | £15,000 | £45,000 |
| 2024/25 | No contribution made so far | £60,000 |
| Total | £45,000 | £155,000 |
Our investor can carry forward £95,000 of unused allowance from the past three tax years. If they have the full £60,000 annual allowance available for 2024/25, they could make a total gross pension contribution of up to £155,000 this year and still receive tax relief.
The pension lifetime allowance
The lifetime allowance has been abolished with effect from 6th April 2024 and has been replaced with a new Lump Sum Allowance of £268,275 and a new Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100. Individuals may have applied for Lifetime Allowance protection in the past, meaning that they have a higher LTA figure. Such higher amount are protected following the 2024 Budget.
How Bestinvest can help
Are you making the most of your pension reliefs and allowances? Bestinvest can help you. We offer free coaching to give you the opportunity to talk to one of our pension team. We’ve also got a multi award winning, low-cost Self-invested Personal Pension – the Best SIPP – which can be suitable for pension consolidation and as a home for new pension contributions.
Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future.
SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you.
