Tax relief
One of the good things about saving in a pension is tax relief. This means you don’t pay income tax on the money you pay into your pension. The full amount you pay goes into your pension savings.
If you pay basic-rate tax at 20%, here’s how tax relief works at now:pensions.
- Your workplace takes your pension payments out of your earnings before the tax comes off.
- So if you pay in £100, the full £100 goes into your pension savings.
- If you take the £100 as pay, rather than putting it into your pension savings, you only get £80, because £20 is paid as income tax.
You get tax relief on any part of your earnings that you put into now:pensions, as long as that part would normally be taxed – that is, anything above your personal allowance (currently £12,570). If you earn less than £12,570, you can get a government tax top-up.
There are limits on how much tax relief you can receive each tax year. These limits are known as the annual allowance and the money purchase annual allowance, as described below. Only one of these allowances will apply to you.
If your earnings are lower than your allowance, you’ll only receive tax relief on pension payments up to 100% of your UK relevant earnings.
UK relevant earnings includes things like statutory sick pay, statutory maternity pay, self-employed income and taxable benefits in kind.
Find out more about UK relevant earnings on the government website.
The annual allowance
The annual allowance for pension contributions is the total amount you and your workplace can pay into your pension savings each tax year and still get tax relief.
It applies to all the pensions you’re actively saving into, including now:pensions if you’re a member, and any other pensions you have. It doesn’t apply to your State Pension.
The annual allowance is currently £60,000 a year for most people. If you go over this, you’ll have to pay tax on the amount over the allowance.
Carrying the annual allowance forward
If you use all your annual allowance in a tax year, carry forward allows you to use any unused annual allowance from the last three tax years. This means you could save more into your pension in the current tax year and still qualify for tax relief.
You can carry your unused annual allowance forward like this for up to three years as long as:
- you’ve been a member of a pension scheme that’s registered with HMRC (like now:pensions) in each of the tax years you want to carry the allowance over from
- you earn at least the amount of money you want to pay in to your pension savings in the current tax year, and
- you haven’t triggered the money purchase annual allowance (see below).
You can check the government’s website to see if you have any unused allowances you can carry forward.
The money purchase annual allowance
If you start taking money out of your pension savings while you’re still paying into them, the money purchase annual allowance could affect you.
The money purchase allowance is currently £10,000 each tax year. This is the total amount you and your workplace can pay into your pension savings, and still get tax relief. You can’t carry forward unused money purchase annual allowance.
When you take money from a pension, you’ll be told if the money purchase annual allowance will then apply to you.
Here are some examples of when the money purchase annual allowance does and doesn’t usually apply.
| Usually applies if you… | Doesn’t usually apply if you… |
| take some or all your pension savings as cash, other than tax-free cash | turn your total amount of pension savings, worth £10,000 or less, into cash |
| put your pension savings into a ‘drawdown’ arrangement and take flexible income from it | put your pension savings into a drawdown arrangement to take flexible income, but don’t take any income from it, other than tax-free cash |
| buy a flexible annuity where income could go down | buy a lifetime annuity to give you a guaranteed income that doesn’t go down |
Tax-free cash and the lump sum allowance
You can usually take up to a quarter of your total pension savings as tax-free cash.
The amount of tax-free cash you can take from all your pensions is limited by the lump sum allowance. This is £268,275 for the current tax year. If the amount of tax-free cash you take from all your pensions is higher than this, you’ll have to pay tax on the amount over the allowance.
There’s also a lump sum and death benefit allowance that applies to your pension savings after you die. It’s the maximum amount that can be paid tax-free from all your pension savings. For most people, this allowance is £1,073,100 for the current tax year.
