Pension tax relief

27% of people surveyed did not know how it worked

To encourage saving for retirement, the government pays tax relief on pension contributions. This means that your pension provider can claim tax back from HM Revenue & Customs (HMRC) and add that amount to each contribution you make.

But this fundamental aspect of pensions remains a mystery to many people, with 27% of people admitting they have never even heard of tax relief, according to new research[1].

Findings identified that only 15% of those surveyed said they fully understood how tax relief on pension contributions work, while a further 31% said they had some understanding. The remaining 27% said they had heard of pensions tax relief but did not know how it worked.

Contributing more towards pensions over time

Differences in understanding are particularly acute between men and women, with one-third (33%) of women having no knowledge of tax relief in comparison to a fifth (20%) of men. A further third (33%) said they had some understanding of how pension tax relief worked in comparison to almost three in five (59%) men.

The data shows that once people had a better understanding of how pensions tax relief works, it made them view pensions more positively and could even lead to them contributing more towards their pensions over time.

Contributing to the pension of a spouse or child

Overall, almost one-third (32%) said they now viewed pensions more positively, while 25% said they would be more likely to increase pensions contributions as a result. Other areas of pensions tax relief causing confusion included the ability to pay contributions for another person, as well as the use of salary and bonus sacrifice.

Of those questioned, 60% said they were unaware they could contribute to the pension of a spouse or child, enabling them to benefit from the tax relief as well as the boost to their pension contributions. There were also low levels of awareness around salary and bonus sacrifice, with 52% and 62% respectively saying they had never heard of the terms.

Tax relief arrangements

The way tax relief is claimed depends on the type of pension you are saving into.

A ‘net pay’ arrangement is used by some workplace pensions, and doesn’t require you to do anything to receive your full tax relief. Your pension contributions are deducted from your salary before Income Tax is paid on them. This means that there is no tax paid and so no tax relief to claim – the gross amount goes to the scheme.

Alternatively, ‘relief at source’ applies to all personal pensions and some workplace pensions. So, if you have a private pension with an insurance company, or a Self-Invested Personal Pension (SIPP), this will apply to you.

If you’re paying into a pension through your employer, your employer will take 80% of your pension contribution from your after-tax salary (technically known as ‘net of basic rate tax relief’). Your pension scheme then sends a request to HMRC, which pays the other 20% tax relief into your pension.

Under this system, higher and additional rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them.

Time to invest in a better retirement?

Pensions can be complex with so many considerations, including your family circumstances, pension rules and tax regulations. Whatever your situation, and however you want to enjoy retirement, we can help discuss the arrangements that are right for your needs. To find out more, please contact us.

Source data:

[1] Research of 2,000 UK adults carried out by Opinium on behalf of Royal London 27 May 2021.