Contributions / Limits
You can contribute as much as you want into a pension, but you'll only enjoy tax relief on the greater of £3,600 and your annual income each tax year, subject to an overall £50,000 cap (including any contributions your employer makes into your pension).
What are the tax benefits?
1. Tax rebates on contributions
The taxman effectively pays you to contribute into a pension by giving 'tax-relief' on the money you pay in. Pension income, when eventually taken, is taxable, but the initial tax-relief can nevertheless provide a welcome boost.
This means a 'gross' £100 contribution will cost you less, as follows:
|Non-taxpayer||Basic Rate Taxpayer||Higher Rate Taxpayer|
Basic rate tax relief is automatically given, so you need to factor this into your contribution, e.g. if you want to put £100 into your pension you pay in £80 and the £20 tax relief is automatically credited to give £100. Higher rate taxpayers then claim the additional 20% tax rebate via their tax return or PAYE.
2. No tax on income or growth
Your investments can grow free of tax within a pension.
3. Tax-free sum at retirement
When you take a pension income at retirement you can withdraw up to a quarter of your pension fund as a tax-free lump sum. Pension income will however be taxable as income.