20 March 2024
Recent research suggests that nearly half of defined contribution (DC) savers in the UK aren’t aware they get tax relief on their workplace pension contributions.
So, if you’re not entirely sure what tax relief is or how it works, read our top five tax facts!
Top 5 tax facts
- Your pension contributions are taken from your gross pay. Gross pay means the amount your employer is paying you before income tax has been deducted. As a result, your pay is lower for tax purposes, so you will pay less tax. In this way, you get tax relief on your contributions. (At Roche, we also use pension salary sacrifice to reduce the cost to you of paying into a pension; salary sacrifice helps to reduce the amount of National Insurance you pay, on top of the income tax relief you get.)
- The amount of tax relief you receive is based on the highest tax rate that applies to your salary. If you pay 20% tax, every £100 you pay into the Roche Pension Fund only costs you £80 (or £72 once you consider salary sacrifice savings*). You get more tax relief if you pay more tax – i.e. if you pay higher or additional rate tax. Even if only a small amount of your pay is taxed at a higher rate, your pension contributions get the full 40% or 45% tax relief.
- The maximum amount of pension saving you can have each year that benefits from tax relief is currently capped at £60,000 (if you have not already accessed any flexible pension benefits). Before April 2023, it was set at £40,000. This cap, called the Annual Allowance, applies to all your pension savings, not just those in the Roche Pension Fund.
- Tax relief means you don’t have to pay tax on the money you put into your pension now, but you might pay tax on it in the future when you take it out; that depends on a lot of factors. Remember too, that you have the option of taking up to 25% of your pension benefits as a tax-free lump sum.
- A final fact: you don’t pay any tax on investment growth in your pension, which can make a big difference to the size of your pension account over the years.
*From 6 January 2024, the headline National Insurance rate was reduced from 12% to 10%, and it will drop to 8% from 6 April 2024. This reduces the amount of savings you make by sacrificing your pension contributions, but your total take-home will increase.