How tax relief boosts your pensions contributions
Tax relief is an important incentive used by the government to encourage people to pay into their pensions.
All UK taxpayers can get at least basic rate tax relief (currently 20%) on their pension contributions. So, for example, if you’re basic rate tax payer, if you make an £80 contribution to your pension, it will be topped up by the £20 you would have paid in tax. This means you get more for your money.
Your employer deducts your pension contributions from your pay before the tax is taken off. This reduces your tax bill and means you get full tax relief whatever rate of tax you pay.
The overall effect of tax relief on your pension is that the benefits you’ll end up with more in your pension each year than the value of the money you put in. Add that to your employer’s contribution and it’s easy to see why your pension is a valuable part of your overall remuneration package.
Although it’s possible to make pension contributions up to the value of 100% of your annual salary, you can’t exceed the annual allowance without incurring a tax charge.