Are pension contributions tax deductible? Understand how to reduce your tax burden

You can boost your retirement savings by making the most of any pension related deduction opportunities available to you. To do so it is important that you fully understand how tax relief on private pension works, which is exactly why Moneyfarm has published this blog.

The types of deductions relating to pensions

If you are employed and your employer has enrolled you in their workplace pension scheme, they will deduct your pension contributions from your gross salary. This is the main type of pension deduction.

The other deduction your employer will make in relation to pension is your National Insurance contribution. NI contributions cover various state benefits including maternity and job seeker’s allowance. They also count towards your State Pension, so this element of your NI contribution may in part also be considered a pension (albeit State Pension) related deduction.

However, in this article, we focus on private rather than State Pensions, as deductions to the former attract tax relief which goes towards maximising your savings for retirement.

Eligibility criteria for pension related deductions

In order to benefit from pension deductions taken from your salary, you must be enrolled in and make contributions to a workplace pension. You are eligible for a workplace pension if you employed and are:

• Aged between 22 and the State Pension age, which at the time of writing is 66.
• You earn more than £10,000 per annum.
• Your place of employment is usually the UK.

If all of the above criteria apply, your employer must by law automatically enrol you in their workplace pension scheme. The contributions you make as an employee will be deducted from your salary and could be eligible for tax relief depending on what sort of arrangement your employer uses – ‘net pay’ or ‘relief at source’.

Is pension deducted before tax? It depends which system your employer uses.

If they use the ‘net pay’ system, the total pension contribution is taken from your pay before tax is calculated, resulting in you receiving tax relief there and then.

If they use the ‘relief at source’ system, the pension contribution is taken from your pay after tax is deducted and 20% tax relief is claimed back from HMRC which is paid into your pension pot

How to calculate your pension related deduction

According to law, as an employee you must contribute a minimum of 5% of your salary to your workplace pension. This can be 5% of your full salary, or 5% of your qualifying salary. What is ‘qualifying salary’? It’s your gross salary (up to £50,270 per annum), minus the £6,240 lower earnings threshold.

As an example, assuming you are a basic rate taxpayer (20%) and have a gross annual salary of £50,000, your pensionable qualifying salary would be £43,760 (£50,000 minus £6,240). If you are contributing the minimum (5%), your annual pension related deduction will be £2,188.

If you prefer, you can use an online pension deduction calculator (like the one on the Money Helper website) to do the calculation for you.

Common mistakes when claiming deductions relating to pensions

There are a few common mistakes some people make in the course of trying to maximise their pension contributions. They include:

• Not claiming deductions when your pension scheme isn’t set up for automatic tax relief.
• Not making use of the carry forward option of unused pension allowances for the previous 3 years.
• Not claiming the 20% additional tax relief via your self-assessment tax return on earning on which you have paid 40% income tax.
• Not claiming the 25% additional tax relief via your self-assessment tax return on earning on which you have paid 45% income tax.
• Exceeding the current £60,000 per annum pension contribution allowance. £60K per tax year is the maximum you can contribute to your pension(s). If you exceed this cap, you should inform HMRC.

The above-mentioned income tax figures relate to England, Northern Ireland and Wales. For figures relating to Scotland, please click here.

The tax benefits associated with deductions relating to pension

The tax benefits associated with pension related deductions are considerable. You can get tax relief on contributions to private pensions up to a 100% of your earnings. Once your employer forwards your pension deduction to the pension provider, the provider then claims tax relief at the basic 20% from the government and adds it to your pension pot.

If you make contributions to a personal pension such as a Stakeholder pension or SIPP, the pension provider will do the same.

Recent changes in pension deduction laws

There have been two significant changes concerning the laws regarding pension deductions. The first was the abolishment from April 2024, of the Lifetime Allowance (LTA) which previously stood at £1.073 million.

The second change was to increase the pension contributions allowance from £40k per annum to £60k.

Step-by-step guide for claiming deductions relating to pensions

Most people do not need to claim pension related deductions because it is already done for them by their employers and pension providers. However, this only relates to basic rate taxpayers. If you’re a higher rate, or additional rate taxpayer, you will need to put in a claim for deductions on any earnings on which you paid 40% or 45% income tax. There are two ways you can go about this. The first is to contact HMRC directly. The second is to file an SA100 self-assessment tax return. Here are the steps to follow:

• If you have not filed a self-assessment tax return before, you will first need to register for self-assessment.
• Once you receive your SA100, HMRC’s Tax Return notes document will help you to complete the form.
• For claiming an extra pension plan deduction, go to the relevant section of the SA100 and insert the exact amount of your pension contributions. Enter the gross calculation – including the basic 20% tax relief.

If you are making a paper self-assessment tax return it must be received by HMRC by 31 October 2024. If you are using the online process (or you’ve missed the paper filing deadline), it must be received by HMRC no later than 31 January 2025.

Applying for a pension related deduction if you’re self-employed

If you are self-employed you will not be eligible for a workplace pension. Instead, you can open a personal pension or SIPP. As mentioned earlier, it is your chosen pension provider’s legal obligation to report any contributions you’ve made to your pension so that the tax relief can be added to your pension pot. This is all that needs to be done if your earnings put you in the basic tax rate bracket.

If you’re a higher or additional rate taxpayer you should complete the appropriate section  in the SA100 self assessment tax-return, which, as a self-employed person, is your legal obligation to send to HMRC anyway.

Frequently Asked Questions

Are pension contributions tax deductible?

It depends. If your workplace pension works on the ‘net pay’ system, your pension deduction is taken before tax is applied and you get 20% tax relief at that stage. If your employer uses the ‘relief and source’ system, tax isn’t deducted, but your pension provider will apply for 20% tax relief from HMRC.

How can I claim extra tax relief on pension contributions if I am a higher or additional rate taxpayer?

You must complete and file an SA100 self-assessment tax return.

Should I make pension related deductions if I am self-employed?

Yes, you should. If you are self-employed and therefore not in a workplace pension scheme, you should start a personal pension or SIPP into which you should make regular deductions from your earnings.