Pensions Tax Relief

Pensions are attractive to many people because they are relatively tax efficient:

• Contributions within the annual allowance (see below) receive tax relief at 20% if you’re a basic-rate tax payer and 40% or 50% if you’re a higher rate tax payer.
• Investment growth is mostly free from tax, although dividends are taxable.
• There are tax-free cash options when you retire.

However, income from your pension is taxable.

On reaching retirement, you can choose to take some of the fund as a tax-free lump sum. This is limited to 25% of the total value of your pension investments.

HM Revenue & Customs (HMRC) sets an annual limit on the contributions you can make into occupational and personal pension schemes. For money purchase schemes, it is the limit on how much can be paid in total in a tax year. For final salary schemes, the limit is on the value put on the increase in your pension gained during the tax year.

If you pay more than the annual allowance (currently £50,000 with provision to carry forward unused allowances from the previous 3 tax years) into such a pension scheme, or the value of your pension exceeds the allowance, you will be charged tax at your marginal rate on the excess.

There is also a limit, called the lifetime allowance (currently £1.8m reducing to £1.5m on 6 April 2012), on the value of retirement benefits that you can draw from an approved pension scheme before tax penalties apply.

For more information telephone 01225 785570 

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