Pensions and tax

Pensions have tax advantages compared to other forms of saving. But it’s also important to know about the pension tax allowances, so you can avoid paying any tax you don’t need to.

Contributions and tax relief

One of the good things about pension saving is that you get tax relief on your contributions. In other words, the income tax you would have paid on your earnings gets added to your pension savings instead.

You get tax relief as long as:

  • the combined contributions from you and your employer
  • to all the pensions you save into in a tax year, including our Scheme and any personal pensions you’re saving into
  • total £40,000 a year or less

This is called the annual allowance.

As long as you stay within the annual allowance you can contribute up to 100% of your salary to your pension savings in a tax year, and you’ll still get tax relief.

Carrying your annual allowance forward

If you didn’t use up all your annual allowance in the last tax year, you can carry it forward and add it to your annual allowance for this year, giving you more scope for adding money to your pension savings. You can carry your unused annual allowance forward like this for up to three years.

You can check the government’s website to see if you have any unused allowances you can bring forwards.

Find unused allowances

The money purchase annual allowance

You need to watch out for this allowance if you want to start taking your pension savings while you’re still paying into a pension. It reduces the combined amount you and your employer can pay into your pension, and still get tax relief, to £4,000 a year.

This won’t stop you paying more than £4,000 into your pension savings, but you won’t get tax relief on any contributions over £4,000 that you and your employer pay into your pension savings in a tax year.

The money purchase annual allowance – £4,000 a year

Usually applies if you… Doesn’t usually apply if you…
take some or all your pension savings as cash buy a pension annuity to give you a guaranteed income
put your pension savings into a ‘drawdown’ arrangement and take income from it put your pension savings into a drawdown arrangement but don’t take any income from it
buy a ‘short-term’ annuity which runs for a set period of time turn a small pension pot worth less than £10,000 into cash

Don’t earn enough to qualify for tax relief? We’ll top it up for you

If you don’t earn enough to pay income tax, you don’t get tax relief – so less money goes towards your pension savings. We don’t want you to miss out, so we’ll give you a tax top-up. You can claim this at the end of the tax year.

What is the tax top-up scheme?

Your built-up benefits and tax

There’s a lifetime allowance for the amount of pension savings you can build up over your working life. It’s set by the government.

You won’t have to pay extra tax as long as the total amount of pension savings you take when you retire is below the lifetime allowance. This applies to the money in all your workplace pensions including our Scheme, and any personal pensions you’ve got, but not your State Pension.

The current lifetime allowance is £1,073,100. The government has said it will stay at this level until 2026.

Retirement options and tax

Options in our Scheme

You can usually take up to a quarter of your pension savings as tax-free cash, as long as your total tax-free cash from all the pension savings you have is less than a quarter of the current lifetime allowance.

If you take cash from your pension savings with us, a quarter (25%) of it will be tax-free. This applies whether you take all your pension savings as cash, or take cash in chunks.

You’ll be liable for income tax on three-quarters of the cash, each time you take some. How much tax you’ll pay depends on how much of your total income for the year is over the income tax personal allowance. This allowance is currently £12,570 a year. The government has said it will stay at this level until 2026.

Options outside our Scheme
The following retirement options aren’t available in our Scheme. You’ll need to transfer your pension savings with us out to another pension provider that offers these options. Find out more about how to transfer your pension savings out from NOW: Pensions.

You can take tax-free cash before using the rest of your savings to:

  • buy a pension annuity for a guaranteed income, or
  • take an adjustable income.

(Tax-free cash is optional – you don’t have to choose it.)

The income you take from these options is taxed in the same way as other income. How much tax you’ll pay depends on how much of your total income for the year is over the income tax personal allowance of £12,570 a year.