I'm looking to start a private pension. If I pay a sum in every month, how does the tax relief work?
06 February 2023
Question by Stephen
I'm looking to start a private pension. I also have an employer pension. If I pay a sum in every month, how does the tax relief work? Does this payment come direct from my employer before tax, or if I pay £100, do I get credited with £140? I'm in the higher tax bracket. Thanks
Answered by Boring Money
Thanks for your question.
I'm not sure why you would start a private pension if your employer provided one. However, this is how tax relief works:
Through your employer, it will depend if this is a contribution on 'relief at source' or NET pay arrangement - Salary sacrifice would be the NET pay arrangement.
Relief at source means you are contributing after being taxed. When the contribution reaches your pension provider, the provider claims BASIC RATE TAX RELIEF ONLY. As a higher-rate taxpayer, you must claim further relief through self-assessment.
Under the NET pay arrangement/Salary sacrifice, you receive full tax relief upfront. This saves you from having to claim tax relief through self-assessment. Salary sacrifice also saves both you and your employer tax - your employer may choose to kick this back to you in the form of a higher pension contribution.
If you pay into a private pension separately, you would receive basic rate tax relief immediately (once the provider has claimed, which is normally straight away). E.g. a £100 contribution would equate to £125, as the amount is netted down (a £125 contribution is only costing £100). You would then need to claim a higher rate of tax relief through self-assessment.
I hope that helps.