How to Claim Tax Relief on Pension Contributions

When you put money into a pension, you are able to get the tax back, also called tax relief, on the amounts you have contributed into the pension. You can get relief on your contributions by either of the three methods listed below taking into account your annual allowance. (To read more on annual allowance, read my article on How Pension contributions and the Annual Allowance Work).

There are three methods by which a member can get tax relief. They are:

  1. Through a net pay arrangement.
  2. By claiming relief at source.
  3. By making a claim to HMRC.

They all result in members getting tax relief on their contribution at the highest rate of tax they pay.


Net pay Method of Relief (Applies to People in Employment)

The net pay method of relief applies to employees in occupational pension schemes and public service pension schemes. Basically, it applies to those who have a pension in their workplace.

The employer takes the pension contributions out of the employee’s gross salary before calculating the income tax due and in this way the employee gets tax relief through their salary, which is otherwise taxed under the Pay As You Earn (PAYE) system.
This relief mechanism is called the net pay arrangement. It gives the same result as a claim to tax relief on contributions, because it reduces the member’s taxable pay by the amount of the contribution.

Most occupational schemes use net pay to collect contributions. This means that tax relief (including higher rate relief) is given immediately and a member’s contributions go straight to the scheme administrator.

Employees Gross pay:                    £25,000
Employee’s pension contribution:  £5,000
Net pay:                                            £20,000

Apart from any other allowances or reliefs, the member’s income tax will be calculated on £20,000 rather than the gross figure of £25,000.


Medical professions
Members of some public service pension schemes, such as some doctors and dentists, are taxed on part of their earnings as trading profits not employment income.
So, if these trading profits are put into a registered pension scheme, they cannot use the net pay arrangement to get tax relief. They would need to make a claim on an SA tax return. Y
They still get tax relief on the contributions from their employment income through the net pay arrangement for the occupational scheme.


Relief at source (RAS) – For contributions to personal pension plans

Relief at source is how a member gets tax relief for contributions to a registered personal pension scheme like a SIPP.

The contribution the member makes is treated as being made net of basic rate tax.
That means they deduct tax themselves before they pay it over and the tax deducted is their tax relief on the payment.

Example: So if a person wants to make a total contribution to their personal pension of £100 they deduct tax at basic rate, say, 20% (£20) and pay a contribution of £80 (£80 x 100/80 = £100).
The scheme administrator claims the £20 back from HMRC and it counts as part of the member’s contribution.

The scheme administrator role
As seen from the above, the scheme administrator claims back the tax deducted by the member (or another person on behalf of the member) from HMRC when they’ve received the member’s assurance that their total contributions to all registered schemes haven’t exceeded the annual limit for relief.

A registered pension scheme must use the Relief at Source method unless the scheme rules say it can use net pay arrangements or accept gross payments.

Both net pay arrangements and relief at source are efficient and save costs. The vast majority of members of registered schemes have their tax relief on contributions dealt with in this way.


Making a claim through Self Assessment for pension Relief – Applies to higher rate tax payers

The most common reason for members making a claim to HMRC is when they’re liable at a higher rate of tax.
If the member pays tax at higher rate then they claim RAS for basic rate relief and make a claim for higher rate relief through Self Assessment (SA).
The balance of the relief at higher rate that they are entitled to is given by increasing the basic rate band.

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