Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Ever looked at your payslip and wondered where all your money actually goes? You’re not alone. The real kicker? You might be missing out on extra cash that could be helping your retirement savings grow.
And that’s exactly where tax relief comes in. It’s one of the easiest ways to keep more of what you earn for your future - once you know how it works.
In this guide we’ll break down what tax relief really means, why it exists and how you can make the most of it (without the jargon).
Why tax relief exists
Tax relief is a government incentive to encourage people to save for retirement. Instead of sending some of your money straight to the tax man, it’s added to your pension pot - boosting your savings.
If you pay tax in the UK, you usually get this benefit automatically - but higher and additional-rate taxpayers may need to claim extra relief through a tax return. It’s one of the best reasons to save into a pension. Just remember, while you don’t pay tax on contributions now, you will when you take the money out later - though the first 25% is usually tax-free and the rest is taxed as regular income once you start drawing from it.
How it works in practice
When you pay into your pension, the government tops up any eligible contributions you make through tax relief - up to a certain amount.
For example, if you pay in £80, the government adds £20 to make it £100 in your pension.
Here’s what that looks like depending on your tax band:
- Basic-rate taxpayer (20%) - £100 in your pension costs you about £80.
- Higher-rate taxpayer (40%) - £100 effectively costs about £60.
- Additional-rate taxpayer (45%) - £100 effectively costs about £55.
This is because the government boosts your contributions with tax relief to make up the rest. And generally, the more tax you pay the more valuable tax relief becomes.
Allowances and rules
You’ll only get tax relief on contributions up to the amount you’ve earned in any given tax year - your annual earnings.
There are also annual limits:
- £3,600 gross (£2,880 personal contribution plus £720 tax relief) if you have little or no earnings.
- £60,000 or 100% of your salary - whatever is lowest.
If you earn a high income, your allowance might be lower (this is called the Tapered Annual Allowance).
It’s also worth keeping in mind if you’ve already taken taxable money from your pension, you may trigger the Money Purchase Annual Allowance - which can drop your annual allowance to £10,000.
How to claim tax relief
Personal pensions - including Self-Invested Personal Pensions - use the ‘relief at source’ method. So, your provider adds basic-rate tax relief (20%) automatically.
- If you’re a basic-rate taxpayer, you don’t need to do anything.
- If you’re a higher or additional-rate taxpayer, you can claim the extra relief through your tax return.
If you're contributing via a workplace, your employer usually sorts this for you automatically. If not, you'll need to claim any extra back yourself via your tax return.
If you haven’t used your full allowance in the last three tax years, you may be able to apply the carry forward rules. Allowing you to contribute more without facing tax charges.
Other pension tax benefits
Tax relief on pension contributions isn’t the only tax benefits available through pensions.
The money and investments inside your pension are also free to grow tax-free from income and capital gains tax, making a significant difference to the value of your pension pot over the years.
And when it eventually comes to withdrawing from your pension you can usually take 25% of your pot tax-free. In some specific cases (such as older pension arrangements), this could be slightly higher.
Key takeaway
Think of tax relief as your pension’s secret superpower. It’s a simple but powerful way to grow your pension faster. By claiming what you’re entitled to, you keep more of your hard-earned money and build a stronger foundation for your retirement. Start today - make it count, you’ve earned it.
Important information - nvestors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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