Pensions Technical factsheet – June 2014
For financial advisers only
Claiming tax relief on personal
contributions
This communication is for financial advisers only. It mustn’t be distributed to, or relied on by, customers.
This factsheet is based on our understanding of current legislation, which may change. The value of any tax relief depends on the individual circumstances
of the investor.
What are the
methods of
claiming tax
relief?
What are the
limits on tax
relief?
How is basic
rate tax relief
given?
How do you
claim higher
rate tax relief?
How do you
claim
additional rate
tax relief?
What is the
time limit for
claiming tax
relief?
How is higher
rate tax relief
calculated?
How is
additional rate
tax relief
calculated?
How are thirdparty
contributions
treated for tax
relief?
What are the methods of claiming tax relief?
Tax relief on personal contributions to a pension arrangement can
generally be given in three ways:
1. Net pay
For a scheme operating under the net pay arrangement, the employer
deducts the contribution from the member’s pay before operating Pay As
You Earn (PAYE) – in this way the member gets tax relief immediately at
the highest marginal rate.
On a net pay basis, because contributions are deducted from pay, tax
relief will only actually be available on a maximum of earnings, even if
these are less than £3,600. For example, if relevant UK earnings are
£3,000, this will be the maximum gross amount that tax relief will be
available on.
Tax relief on personal contributions made by a third party can’t be given
under net pay. If such a contribution is made, the member must claim
any relief due via self-assessment.
Typically, occupational pension schemes accept personal contributions
using the net pay method.
2. Relief by claim
The contribution is paid gross, and the member claims tax relief through
self-assessment.
Typically, retirement annuity contracts accept personal and third party
contributions using the relief at claim method. Note, retirement annuity
contracts can accept contributions using the relief at source method if a
provider has made a decision to allow this.
If an individual’s earnings are below £3,600 pa and they have a
retirement annuity contract to which they make gross contributions, they
will only be able to claim tax relief on up to 100% of their earnings. If an
individual has no earnings, they will be unable to claim tax relief on any
pension contributions they make.
3. Relief at source
Under a scheme operating relief at source, contributions are paid net of
basic rate tax. The scheme administrator claims the tax relief due from
HMRC and applies it to the member’s arrangement. Higher and additional
rate taxpayers can claim the extra tax relief through self-assessment.
Typically, personal pension and stakeholder arrangements accept
personal and third party contributions using the relief at source method.
Although it is possible under HMRC guidance, for retirement annuity
contracts to accept contributions by relief at source, some providers will
only accept gross contributions in practice.
What are the limits on tax relief?
The tax-relievable limit for personal contributions is the higher of:
 100% of the member’s relevant UK earnings or
 £3,600, per year.
All contributions paid by a member plus those paid on their behalf by a
third party or by their employer are tested against the annual allowance.
If a member’s total contributions exceed their annual allowance limit for
the tax year (even after carry forward has been used), they will still be
able to claim higher rate and additional rate tax relief on their personal
contributions, but an annual allowance charge will apply to the excess
contributions.
The allowances and tax rates applicable in the 2014/15 tax year are:
Allowances & Tax bands
Annual allowance
Personal Allowance
Basic rate tax band -20%
Higher rate tax band – 40%
Additional rate tax band – 45%
Tax year 2014/15
£40,000
£10,000*
Up to and including £31,865
£31,866 - £150,000
Over £150,000
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*The personal allowance is reduced by £1 for every £2 of income above a
£100,000 income threshold, so in effect there’s no personal allowance for
those earning £120,000 or above.
Although it is possible under HMRC guidance for contributions to be paid
to a retirement annuity contract net of basic rate tax relief, some
providers will only accept gross contributions in practice.
How is basic rate tax relief given?
Where the contribution is paid gross to the retirement annuity contract,
tax relief will need to be claimed from HMRC. Tax relief is given by way of
a deduction from the member’s total income.
A member’s personal contributions are paid to a personal pension
provider net of basic rate tax. This is the case whether the member pays
the contributions directly to the provider, or the employer deducts the
net contribution from the member’s pay (after the deduction of income
tax) and passes it on. This method of providing basic rate tax relief is
known as ‘relief at source’.
If a member has relevant UK earnings of less than £3,600 but is making
a personal contribution of more than this, they can get tax relief on the
excess over their relevant UK earnings up to the limit of £3,600. Relief at
source is the only method which allows members to get this extra tax
relief on contributions that exceed their relevant UK earnings (up to
£3,600).
Even if an individual has no earnings, they will still be able to claim tax
relief on any pension contributions they make by relief at source up to
the limit of £3,600.
The personal pension provider will add basic rate tax relief to the net
contribution so that the total gross amount is invested for the member.
The pension scheme provider will recover the basic rate tax relief from
HMRC.
Tom pays a personal monthly net contribution of £400 to his employer’s
group personal pension scheme. His employer deducts the net amount
from Tom’s pay after tax and national insurance have been deducted.
The £400 is paid to Tom’s personal pension plan and basic rate tax relief
of £100 is added which means a gross contribution of £500 per month is
invested.
How is higher rate tax relief calculated?
Higher rate taxpayers may be entitled to further tax relief on personal
contributions paid to their personal pension scheme. As the pension
scheme provider gives basic rate tax relief at source, the member claims
any higher rate tax relief from HMRC. The extra tax relief available
depends on the total personal contributions paid and the member’s total
income.
The extra tax relief due is given by extending the basic rate tax limit. The
following example show how this works.
Barry’s gross income is £100,000. His personal allowance is £10,000,
which means he has taxable income of £90,000. He makes a net pension
contribution of £32,000 to his pension provider and basic rate tax relief of
£8,000 is added, resulting in £40,000 being added to his personal
pension. The following table shows that he can claim a further £8,000
higher rate tax relief:
Tax rate
0%
20%
20% extension
40%
Total tax
Tax payable
assuming no
pension
contribution
Tax band Tax
£10,000
0
£31,865
£6,373
N/A
£58,135
£23,254
£29,627
Tax payable
assuming £40,000
gross pension
contribution
Tax band Tax
£10,000
0
£31,865
£6,373
£40,000
£8,000
£18,135
£7,254
£21,627
His total gross annual contribution is £6,000 (£4,800 net)
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The difference between the total tax figures is £8,000 and this is the
higher rate tax relief that Barry can claim back from HMRC. The total tax
relief of £16,000 is 40% of the gross contribution of £40,000.
In this example, Barry’s income has to be above £81,865 (£10,000 +
£31,865 + £40,000) to allow him to claim full higher rate tax relief on the
contribution paid. If, say, his income was £65,000 and a £40,000 gross
contribution was made to his personal pension, then he would not be able
to claim higher rate tax relief on the whole of the contribution. He would
only be able to claim higher rate tax relief on £23,135 (£65,000 £31,865 - £10,000), which would equate to £4,627. That is, the 20%
extension is only given up to the level of his income of £65,000. The total
tax relief would be £12,627, made up of £8,000 at basic rate and £4,627
at higher rate.
How is additional rate tax relief calculated?
Additional rate taxpayers may be entitled to further tax relief on personal
contributions paid to their personal pension scheme. As the pension
scheme provider adds basic rate tax relief at source, the member claims
any higher rate and additional rate tax relief from HMRC. The extra tax
relief available depends on the total personal contributions paid and the
member’s total income.
The extra tax relief due is given by extending both the basic and higher
rate tax limits for additional taxpayers. The following examples show how
this works.
Larry’s gross income is £200,000. His personal allowance is £0, which
means he has taxable income of £200,000. He makes a net pension
contribution of £32,000 to his pension provider and basic rate tax relief of
£8,000 is added, resulting in £40,000 being added to his personal
pension.
The following table shows that he can claim the maximum £10,000
additional rate tax relief:
Tax rate
20%
20% extension
40%
40% extension
45%
Total tax
Tax payable
assuming no
pension
contribution
Tax band Tax
£31,865
£6,373
N/A
£118,135
£47,254
N/A
£50,000
£22,500
£76,127
Tax payable
assuming £40,000
gross pension
contribution
Tax band Tax
£31,865
£6,373
£40,000
£8,000
£78,135
£31,254
£40,000
£16,000
£10,000
£4,500
£66,127
The difference between the total tax figures is £10,000 and this is the
additional rate tax relief that Larry can claim back from HMRC. The total
tax relief of £18,000 is 45% of the gross contribution of £40,000.
In this example, Larry’s income has to be above £190,000 (£31,865 +
£40,000 + £78,135 + £40,000) to allow him to claim full additional rate
tax relief on the contribution paid. If, say, his income was £175,000 and
a £40,000 gross contribution was made to his personal pension, then he
would not be able to claim additional rate tax relief on the whole of the
contribution. He would only be able to claim additional rate tax relief on
£25,000 (£175,000 - £78,135 - £40,000 - £31,865), which would equate
to £11,250.
That is, the 40% extension is only given up to the level of his income of
£175,000. The total tax relief would be £19,250, made up of £8,000 at
basic rate and £11,250 at additional rate.
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How are third-party contributions treated for
tax relief?
A third-party contribution is paid by a person other than an employer. A
person is defined in HMRC guidance as an individual, a corporate body or
other legal entity. The contribution is treated as if the member had paid it
– so the third party pays the contribution net of basic rate tax but it’s the
member who gets basic rate tax relief and can claim any higher rate and
additional rate tax relief on the gross contribution. Even if the third party
is a higher rate or additional rate taxpayer, they are not entitled to claim
any tax relief on a contribution they pay into someone else’s pension
scheme.
Jane pays a net annual contribution of £2,000 to her personal pension
plan and her husband pays a further net annual contribution of £2,000
into her plan. Basic rate tax relief of £1,000 is added so a total gross
contribution of £5,000 is invested in Jane’s plan. As Jane is a higher rate
taxpayer with earnings of £100,000, she can claim an additional 20%
relief on the total gross amount of £5,000. So the extra tax relief that
Jane can claim is £1,000.
How do you claim higher rate tax relief?
Disregarding the net pay system, there are two ways for higher rate tax
relief to be claimed:
1. Through the annual self-assessment tax return
Higher rate tax relief can be claimed by entering the amount of gross
personal contributions made to a personal pension scheme in the
relevant part of the annual self-assessment form (including any
contributions made by a third party). Employer contributions should not
be included in this amount.
Tax relief is given in one of three ways:
 a change to the tax code.
 a tax rebate.
 a reduction in tax already due to HMRC.
2. By notifying the local tax office
People who don’t usually fill in an annual self-assessment form, or who
don’t want to wait for their higher rate tax relief, can phone or write to
their local tax office with details of:
the personal pension scheme that personal contributions are being
paid to,
 the date that the contributions start, and
 the gross amount of the personal contributions paid.
The local tax office will then arrange for their tax code to be changed so
that higher rate relief is available throughout the year in which the
contributions are being made.

Any changes to the information given can be notified either by letter or
through a self-assessment tax return at the end of the tax year.
How do you claim additional rate tax relief?
Disregarding the net pay system, additional rate tax relief must be
claimed through a self-assessment tax return. This would be done in the
same way as described under ‘How do you claim higher rate tax relief?’.
Details of how to contact HMRC for help with Self-Assessment and
Income Tax enquiries can be found here:
http://search2.hmrc.gov.uk/kbroker/hmrc/contactus/start.jsp
HMRC guidance for tax relief on member pension contributions can be
found here:
http://www.hmrc.gov.uk/incometax/relief-pension.htm
http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05101000.htm
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What is the time limit for claiming tax relief?
There is a time limit of four years to claim back any tax relief from HMRC.
A claim must be made within four years of the end of the tax year that a
member is claiming for. For example, if tax relief is to be claimed for the
2010/11 tax year, then a claim would need to be made by 5 April 2015.
This could be of use for higher/additional rate taxpayers if they had
forgotten to claim higher and/or additional rate tax relief for any personal
contributions they had made.
Further information from HMRC on claiming tax relief after the deadline
for self-assessment for the relevant tax year has passed can be found
here:
http://www.hmrc.gov.uk/sa/correct-repay.htm#2
This factsheet was produced by Pensions Technical Services
email: pts@aegon.co.uk
Aegon is a brand name of Scottish Equitable plc, registered office: Edinburgh Park,
Edinburgh EH12 9SE. Registered in Scotland (No. 144547). Authorised by the Prudential
Regulation Authority and regulated by the Financial Conduct Authority and the Prudential
Regulation Authority. FCA register number 165548. An Aegon company. www.aegon.co.uk
© 2014 Aegon UK plc
C284324 06/14
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