Tax and pensions

When it comes to the tax aspects of saving money into your pension, the good news is that it doesn’t have to be taxing!

In general terms, building your savings for retirement by putting money into your pension is a great way to save because it’s very tax-efficient. Broadly speaking, there are three things you need to know:

1. The Government gives you tax relief when you save into your pension. If you’re a basic-rate taxpayer, for every £80 you put into your pension, the Government gives you an extra £20 in tax relief – so that’s a free 25% bonus.
2. The money in your pension is invested with the aim of making it grow over time, and that growth is tax-free, too.
3. At the age of 55, you can typically take 25% of the money you’ve saved in your pension as a tax-free lump sum.
4. Pension savings grow in a tax free environment, unlike other non pension savings products.

Higher-rate and additional-rate tax relief

If you’re a higher-rate taxpayer, the benefits can be even greater. You can claim an extra 20% in tax relief (or 25% if you’re an additional-rate taxpayer) through your self-assessment tax return. This makes pension contributions one of the most efficient ways to reduce your overall tax bill while securing your financial future. Find out more about tax relief.

Annual allowance

It’s worth noting that there are limits to how much you can contribute to your pension each year and over your lifetime, while still receiving tax relief. The annual allowance is currently set at £60,000, although this may be lower if your income exceeds certain thresholds. You should carefully consider how you take your pension savings. Before you decide what you want to do, make sure you seek help and guidance.

What happens when you access your pension?

The lump sum allowance caps the total amount that you can take out of your pension tax free. 

While 25% of your pension can be taken as a tax-free lump sum when you retire, any further withdrawals are taxed as income at your marginal rate. 

This is important to consider when planning your retirement, as taking large withdrawals could push you into a higher tax bracket. Spreading your withdrawals over several years could help reduce your tax liability.

To find out more, why not watch our short video?

Final thought

This information is for guidance purposes only and is not financial advice. If you need financial advice you can locate a regulated financial adviser on the MoneyHelper website. Where we provide links to third-party websites we are not responsible for their content, so it's important for you to carry out your own independent research.