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Pension reliefs and allowances

Pensions come with generous tax allowances and reliefs to encourage us to save for retirement. These allowances and reliefs are not set in stone – the Chancellor of the Exchequer can make changes to them during the annual Budget – which is why we always say that you should make the most of them if you can
Published on 15 May 2020
Last updated on 29 March 2021

Pension tax relief

Investments in pensions grow free from Income Tax and Capital Gains Tax.

The Government also gives you tax relief on pension contributions up to your annual allowance (more on the annual allowance below). Anything you invest will be topped up by 20% automatically.

Higher-rate taxpayers can claim back another 20% through their tax returns. Additional-rate taxpayers can claim back another 25% through their tax returns.

Pension tax relief infographic

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.

Pension allowances

The pension annual allowance

You can pay as much as you want into a pension every year but there are limits to the amount of tax relief you will receive. This is known as your annual allowance. 

Every year you can contribute as much into your pension as you have earned, usually up to a maximum of £40,000. If you go over your allowance there will be a tax charge.

This £40,000 annual pension allowance is tapered down for higher earners. This is known as the tapered annual allowance.

The allowance reduces by £1 for every £2 of income above £240,000, down to a minimum of £4,000 (although the rules over what constitutes income are complex!).

Pension carry forward

Under pension carry forward rules you can make pension contributions above your annual allowance. You do this by using any unused allowance from the last three tax years. You need to use all of your current annual allowance first, and then you can carry forward your allowances starting with the earliest of the three years. The contribution can be no more than 100% of earnings.

Pension carry forward – an example

Our investor can carry forward £70,000 of unused allowance from the past three tax years. If they have used the full £30,000 tapered annual allowance for 2021/22, they could make a gross pension contribution of up to £100,000 this year and still receive tax relief.

The pension lifetime allowance

The lifetime allowance is the amount you can build up across all of your pensions without paying a tax charge. It is currently £1,073,100.

If your pension is valued above £1,073,100 when you retire, you could face a significant tax bill in the future. Any excess will be taxed at 55% if taken as a lump sum or 25% if taken as taxable income.

Pension lifetime allowance infographic

How Bestinvest can help

Are you making the most of your pension reliefs and allowances? Bestinvest can help you. We offer free pension reviews to give you the opportunity to talk to one of our pension team. We’ve also got a multi award winning, low-cost Self-invested Personal Pension – the Best SIPP – which can be suitable for pension consolidation and as a home for new pension contributions.


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Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future.
SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you.