Most employers are now required to make pension contributions for most of their employees, often using an occupational pension scheme to which employees also contribute.
Private pension contributions are tax-free up to certain limits, and this applies to most private pension schemes, e.g. workplace pension, personal pensions and foreign pension schemes that qualify for UK tax relief.
Pension schemes must be registered with HM Revenue and Customs (HMRC) to qualify for tax relief and tax is payable if savings in pension funds exceed:
- 100% of earnings in a year - this is the limit of the tax relief that can be obtained.
- £40,000 per year - it is advisable to check your 'annual allowance'.
- £1,073,100 over the lifetime of the individual - this is the limit of the lifetime allowance.
You are also liable to pay tax on contributions if the individual's pension institution:
- was not registered for tax relief with HMRC.
- the pension capital had not been invested in accordance with HMRC's rules.
It is also worth mentioning that tax relief would be automatic if:
- the employer would deduct the pension contributions (workplace pension) from the individual's salary before deducting income tax.
- the income tax rate was 20%: the pension advisor would claim the tax relief and add it to the pension fund ("relief at source").
It is also worth mentioning that tax relief on private pension contributions is available up to 100% of the individual's annual income.
It is the individual's responsibility to ensure that he or she does not receive tax relief on pension contributions worth more than 100% of annual earnings, as HMRC could reclaim anything over this limit.
In terms of documentation, the individual will need to provide the pension provider with personal details including their National Insurance Number, employment status and state whether they are of pensionable age, full-time student, carer or under 16. The individual's employer will take care of this on their behalf if they are automatically enrolled in the pension scheme and in this case, the pension provider will inform the individual within 30 days and ask for confirmation that the data is correct.
It is also important to note that it would be possible to claim tax relief on pension contributions if:
- the income tax rate was higher than 20% and the pension institution claimed the first 20% for the individual (relief at source).
- the pension scheme was not set up for automatic tax relief.
- someone else would make contributions to the individual's pension.
If the pension scheme was not set up for automatic tax relief, it could be claimed through Self-Assessment by increasing the amount of one's personal allowance.
Finally, the annual allowance is the maximum that can be saved in pension funds in a tax year (6 April to 5 April of the following year) before tax is due. Taxes will only have to be paid if the annual allowance is exceeded, which for this tax year is £40,000 and applies to all private pensions (if holding more than one).