In the UK, income tax is usually payable to HMRC on taxable income above a person’s Personal Allowance. This allowance is a tax-free amount, and the standard amount stands at £12,500 in 2019/20. Tax must be paid on most pensions, including the state pension, company and personal pensions, and retirement annuities. However, tax relief may be claimed on private pension contributions.

The relief can apply to up to 100 per cent of a person’s annual earnings.

It may be automatically accessed if one’s employer takes workplace pension contributions out of an employee’s pay before deducting Income Tax.

If a person’s rate of Income Tax is 20 per cent then the tax relief may also be automatic, as one’s pension provider will claim it as tax relief and add it to the pension pot. This is known as “relief at source”.

Relief at source tax relief occurs in all personal and stakeholder pensions, and some workplace pensions.

Citizen’s Advice states: “You can get tax relief on pension payments you make into a company (occupational) pension, personal pension or stakeholder pension, as long as HMRC has approved the pension scheme.”

In Scotland, Income Tax rates differ to other parts of the UK.

The government website explains that for those who live in Scotland and pay the 19 per cent rate, their pension provider will claim the tax relief on their behalf at a rate of 20 per cent – with the difference not required to be paid.

There is an annual allowance on the amount of money which can be saved in a pension pot during one tax year – which spans form April 6 to the following April 5.

This tax year, this figure stands at £40,000.

Tax is only payable on private pension contributions should one exceed this amount.

The Money Advice Service explains: “If you’re a UK taxpayer, in the tax year 2019-20 the standard rule is that you’ll get tax relief on pension contributions of up to 100 per cent of your earnings or a £40,000 annual allowance, whichever is lower.

“Any contributions you make over this limit won’t attract tax relief and will be added to your other income and be subject to Income Tax at the rate(s) that applies to you.”

Should a person use all of their annual allowance for the current tax year, it may be possible to carry over any unused annual allowance from the previous three years.

Gov.uk points out that those who have a high income or who have flexibly accessed their pension pot may have a lower annual allowance than £40,000.

There is also a lifetime allowance on a pension pot – with the threshold for this currently being £1,055,000.

Tax may be payable if a person’s pension contributions exceed this amount.

The rates depend on how it is paid, with this being 55 per cent if it is via a lump sum, and 25 per cent in any other form – such as via pension payments or cash withdrawals.

READ MORE: Tax allowance: Which state benefits are taxable? FULL LIST of common tax-free benefits

Source link