Tax relief on Pensions

EucalyptusGenie

I understand the government add 20% on top of your pension contributions every year, (up to a limit of £20,000 pension contribution). My question is whether this addition is linked to the amount of tax you pay.

For example, if you paid a lump sum and the tax relief due on it exceeded the amount that you paid in income tax, would you lose out on that contribution to your pension? This is relevant if you could spread the lump sum contribution over more than one year to maximise the 'tax-back', if the two things are connected.

Dazed_and_C0nfused

EucalyptusGenie said:

I understand the government add 20% on top of your pension contributions every year, (up to a limit of £20,000 pension contribution). My question is whether this addition is linked to the amount of tax you pay.

For example, if you paid a lump sum and the tax relief due on it exceeded the amount that you paid in income tax, would you lose out on that contribution to your pension? This is relevant if you could spread the lump sum contribution over more than one year to maximise the 'tax-back', if the two things are connected.

The only type of pension contributions that have pension tax relief added are those paid using "relief at source" method and it's actually 25% that is added, not 20%.

So if you pay £100 you get £125 in your pension fund.

There is absolutely no connection between that pension tax relief and the tax you pay.  Pension tax relief is not a refund of tax you have paid.

Where have you got the £20,000 figure from?

molerat

The tax you actually pay is not linked to the tax top up. You could earn £12000 which would not be taxable, pay £9600 into a pension and receive a £2400 top up.  You are limited though to contributing the maximum of your "relevant income", basically your wages, gross into a pension.  There is not a £20K limit.

Organgrinder

It depends on how you pay. If it's deducted before tax you automatically get tax relief in that you only pay tax on your earnings after your pension has been deducted.

If you pay into a scheme from your earnings after tax, then you should get the tax back. So for every £100 you contribute you get £25 added. Gross contribution £125, net £100 so getting your basic rate tax back.

If you pay tax at a higher rate you need to notify HMRC. For contributions up to £10k gross this can be done over the phone. Otherwise via a tax return. This means a higher rate tax payer will get additional tax relief, usually in the form of a changed tax code.

EucalyptusGenie

This is all brilliant, thank you so much! 
Very helpful
 
I can't remember what the £20,000 was about now, but I must've meant £60,000 annual allowance.