Personal Pension Contributions
Individuals working as an employee or self-employed/director can contribute to any number of pension plans.
Personal contributions made by an individual are unlimited. However there is a limit on the amount of gross contributions that an individual can pay each year and benefit fully from tax relief.
Important – Tax relief is only given in the tax year the contribution is paid. For example, you must pay into pension between 06 April 2020 and 05 April 2021 to claim tax relief for 2020-21 tax year. The tax relief is restricted to the higher of £3,600 or 100% of relevant UK earnings – subject to the annual allowance.
Relevant UK earnings means any one or more of the following types of income:
- employment income, such as: pay, wages, bonus, overtime, or commission and other P11D benefits.
- income from self-employment or a partnership
- redundancy payment above the £30,000 tax exempt threshold
- income from a UK and/or EEA furnished holiday lettings business
- patent income, where the individual alone or jointly devised the invention
Pension income, Capital Gains, rental income and investment income such as dividend is not classed as earnings and cannot be included in the definition of relevant UK earnings.
Income from pension products doesn’t count as relevant UK earnings.
You can get tax relief on private pension contributions worth up to 100% of your annual earnings.
You get the tax relief automatically if your:
- employer takes workplace pension contributions out of your pay before deducting Income Tax
- rate of Income Tax is 20% – your pension provider will claim it as tax relief and add it to your pension pot (‘relief at source’)
If your are a higher rate tax payer then you can claim an extra tax relief of 20% on the higher rate tax paid. This is normally done via self-assessment tax return.
You might be able to carry over any annual allowance you did not use from the previous 3 tax years.
Annual allowance is the most you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax. You’ll only pay tax if you go above the annual allowance. This is £40,000 this tax year for 2020-21.
If you have a high income then, you’ll have a reduced (‘tapered’) annual allowance in the current tax year if both:
- your ‘threshold income’ is over £200,000
- your ‘adjusted income’ is over £240,000
For Self-employed, the pension contributions are not a business expense and therefore they don’t affect your self employed profits. Any personal pension contributions you make will usually get 20% tax relief from the government and in addition to this you will get income tax relief through your personal tax return if your earnings are above the basic tax band.
Company Pension Contributions
Employer contributions are not restricted by the employee’s relevant UK earnings, however they must satisfy the ‘wholly and exclusively’ requirement to receive tax relief.
Employer contributions are paid gross and corporation tax relief is available. The company pension contribution is treated as business expense.
Tax relief is normally only given in the accounting period the contribution is made.
Employer contributions count towards the annual allowance and tapered annual allowance.
Carry forward of unused annual allowance can also be used to cover employer contributions that are over the annual allowance.
Employer contributions over the annual allowance may also be subject to the annual allowance payable by the individual. Carry forward can also be used here to avoid the annual allowance charge.
Please note pensions are a highly complicated topic. You should always get advice from a qualified pension advisor before making any decisions.