Tax on Pension Contributions

Tax on Company Pensions

If you are paying into a company pensions scheme, it is probable that the contribution is deducted directly from your salary, in the same way that income tax and national insurance is collected. However, your pension is deducted from your salary BEFORE the income tax (PAYE) is calculated, which means that the contributions are tax free, and you pay less income tax as a result (as your salary is now effectively reduced by the amount of the contribution.

For example:
Lets say you were on a £20,000 per year salary.
Your monthly gross wage would be £1666.67.
You would pay (approximately) £225.42 income tax.
You would pay (approximately) £130.90 national insurance.
You would take home £1310.35

However, if you paid, say 5% into a pension scheme:
Your monthly gross wage would be £1666.67.
You would pay (approximately) £208.75 income tax.
You would pay (approximately) £130.90 national insurance.
You would pay £83.33 pension contribution.
You would take home £1243.68

So effectively, your £83.33 pension contribution has only cost you £66.67 after the tax relief has been applied

Tax on Personal Pensions

if you pay into a personal pension plan the tax relief should be claimed by your pension provider, and the relief would be added to your pension fund. If you are a higher rate tax payer, you will need to claim your own tax relief through your self assessment tax return.

Back to pension tax.

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