Pension Tax Relief
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Pension tax relief is an important component in a pension fund. Money, when linked with taxes, need not trigger losses if one takes the trouble to plan and save well. True, it is mandatory to pay taxes on every source of legitimate income. Incomes from pensions are also not spared from tax. That is why many governments and private agencies have devised pension tax relief schemes to provide senior citizens and retirees with additional pension benefits. It is a sure way to make life easier for the pension holders.[br]
How Pension Tax Relief works
Pension tax relief on an individual’s pension contribution depends on whether he/she pays into:
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a company pension or
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a personal pension or
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a government pension
Employer based pension tax relief: In this case, the employer takes the pension contributions from an individual’s pay before deducting tax, not the National Insurance contributions. Whether one pays tax at basic or higher rate, the full tax relief is secured anyway. However, some employers prefer to use the same method of paying pension contributions that is used by personal pension scheme payers too.
Personal pension tax relief: In the UK, one pays Income Tax on his/her earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 one pays into his/her pension, he/she receives £100 in the pension fund. If the tax is paid at a higher rate, the difference can be claimed through an individual’s tax return or by making a claim to the HM Revenue & Customs (HMRC).[br]
Annuities pension tax relief: Most retirement annuity providers do not offer a tax relief for the pension scheme, where they can claim back tax at the basic rate. Instead, one needs to claim the pension tax relief that is due through the individual tax return.
Limits on Pension Tax Relief
There are limits on the amount of pension tax relief one can get. It is possible to save as much as possible and get tax relief on contributions of up to 100 per cent of the earnings like salary and other earnings each year. However, the contributions must be made before the age of 75.
