Contributing to pension cuts tax

sweetbutternut

I understand that by contributing to a pension I can increase my pension pot - for eg if I top up by £80 I get another £20 added on. However, does it also mean that my taxable income is reduced by £80?

xylophone

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CLAPTON

sweetbutternut wrote: »

I understand that by contributing to a pension I can increase my pension pot - for eg if I top up by £80 I get another £20 added on. However, does it also mean that my taxable income is reduced by £80?

there are essentially two ways of contibuting to a pension

a. an occupational pension scheme : the money comes direct from your salary before tax
so if you contribution 100 then you pay 20 less tax than you would otherwise (or £40 if a 40% tax payer)

b. if you have a private pension scheme then you contribute from after tax income

then you pay in £80 and the government refunds £20 to your pension fund so the total contribution is 100

so both methods give you a benefit of a 20% reduction in tax for any give gross pension contribution