What are the methods of claiming tax relief?
Tax relief on personal contributions to a pension arrangement can generally be given in three ways:
- Net pay
For a scheme operating under the net pay arrangement, the employer deducts the contribution from the member’s pay before operating Pay As You Earn (PAYE) – in this way the member gets tax relief immediately at the highest marginal rate. On a net pay basis, because contributions are deducted from pay, tax relief will only actually be available on a maximum of earnings, even if these are less than £3,600. For example, if relevant UK earnings are £3,000, this will be the maximum gross amount that tax relief will be available on. Tax relief on personal contributions made by a third party can’t be given under net pay. If such a contribution is made, the member must claim any relief due via self-assessment. Typically, occupational pension schemes accept personal contributions using the net pay method.
- Relief by claim
The contribution is paid gross, and the member claims tax relief through self-assessment. Typically, retirement annuity contracts accept personal and third party contributions using the relief at claim method. Note, retirement annuity contracts can accept contributions using the relief at source method if a provider has made a decision to allow this. If an individual’s earnings are below £3,600 pa and they have a retirement annuity contract to which they make gross contributions, they will only be able to claim tax relief on up to 100% of their earnings. If an individual has no earnings, they will be unable to claim tax relief on any pension contributions they make.
- Relief at source
Under a scheme operating relief at source, contributions are paid net of basic rate tax. The scheme administrator claims the tax relief due from HMRC and applies it to the member’s arrangement. Higher and additional rate taxpayers can claim the extra tax relief through self-assessment. Typically, personal pension and stakeholder arrangements accept personal and third party contributions using the relief at source method. Although it is possible under HMRC guidance, for retirement annuity contracts to accept contributions by relief at source, some providers will only accept gross contributions in practice.
What are the limits on tax relief?
The tax-relievable limit for personal contributions is the higher of:
- 100% of the member’s relevant UK earnings or
- £3,600, per year.
All contributions paid by a member plus those paid on their behalf by a third party or by their employer are tested against the annual allowance. If a member’s total contributions exceed their annual allowance limit for the tax year (even after carry forward has been used), they will still be able to claim higher rate and additional rate tax relief on their personal contributions, but an annual allowance charge will apply to the excess contributions.
Claiming tax relief via self assessment, Self Assessment: claim tax relief on pension contributions – GOV.UK (www.gov.uk)
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