There are limits on how much can be invested in a pension scheme before a tax charge is payable. To qualify for tax relief, a contribution must be a relievable pension contribution made by or on behalf of a relevant UK individual.
A relevant UK individual is someone who:
- has relevant UK earnings chargeable to income tax for that tax year
- is resident in the UK at some time during the tax year
- was resident in the UK at some time during the immediately preceding five tax years and also when joining the pension scheme.
The maximum amount of contributions on which a member can claim relief is the lower of 100% of annual earnings or £40,000 (this is referred to as the annual allowance).
The annual allowance reduces where income, including company pension contributions exceeds £150,000. The allowance of £40,000 is tapered at a rate of £1 for each £2 of income over the limit, to a minimum of £10,000.
Individuals who do not earn or earn less than £2,880 a year can contribute to certain types of pension and receive basic rate income tax relief.
Individuals who don't pay income tax can get tax relief on at the basic rate of 20% on the first £2,880 they pay into a pension each tax year. This relief is only given if the pension scheme claims relief at source (RAS).
A registered pension scheme must operate RAS unless the scheme rules specifically provide that it can operate net pay arrangements or accept contributions gross from members. Under RAS, premiums are paid net of basic rate tax, which is claimed back by the scheme administrator.
Higher rate relief can be claimed through the member's self assessment tax return.
With net pay arrangements, the employer deducts the relievable pension contribution from employment taxable income before operating PAYE (so tax relief is obtained by paying the contribution out of pre-tax income). A member making payments in full (that is, out of after-tax income) has to claim the tax relief from HMRC, generally through self assessment or PAYE code.
Any employer of a member of a registered pension scheme, including all schemes established under auto-enrolment, may make contributions to that registered pension scheme.
Unlike scheme members, there is no set limit on the amount of tax relief that an employer may receive in respect of its contributions, although the amounts contributed still count towards the annual allowance for the year.
A person other than a scheme member or employer may make a contribution to a registered pension scheme on behalf of someone else.
The scheme member will automatically get 20% tax relief if the contribution is paid under PAS. The member can claim higher rate relief in the normal way.