With the 5 April end of tax year approaching, we answer our members’ most frequently asked questions about pension tax
For more information on pension tax, take a look at www.thepeoplespension.co.uk/pension-tax/
If you’d like in-depth advice, and you can’t find the answer to your query below, you may wish to speak to your financial adviser. If you don’t have an adviser, you can find one at www.unbiased.co.uk.
When is the deadline to pay a lump sum to qualify for this tax year?
If you’d like to pay in a lump sum to be included for this 2021/2022 tax year, you’ll need to complete the Personal contributions form.
So that we can process this before the end of the tax year, please ensure the form arrives to us by 25 March 2022.
Payments will need to reach our bank account by 31 March 2022 to ensure they’ll be included in the 2021/2022 tax year. Payments received after 29 March 2022 will be accepted but may not be included in this tax year.
How do I set up a direct debit payment to make personal payments?
You can do this by following these simple steps:
We need the personal contributions form and the Direct Debit mandate form completed and returned before we’re able to carry out our checks. Until we’ve completed our checks, we won’t be able to begin taking payments from you.
You can print, scan and send this to us at email@example.com, though please note this isn’t considered a secure way of sending us your information. You can also print and send this to us by post at Freepost THE PEOPLE’S PENSION. It’ll take around 10 working days to arrange your Direct Debit with your bank – we’ll write to you once it’s set up.
For more information about tax relief, and the amount you can save into your pension and receive tax relief on, follow the links below…
What’s the maximum amount I can pay into my pension pot?
You can pay as much as you like into your pot, but there are limits to how much tax relief you can receive. If you’re under 75, you’re eligible to pay in up to 100% of your UK taxable earnings or £3,600 gross (whichever is higher) and receive tax relief on your contributions. The value of the tax relief depends on your individual circumstances.
The annual allowance is the maximum you can pay into all of your pension plans combined before a tax charge applies. For the 2021/2022 tax year the annual allowance is £40,000, although you could be subject to a lower amount, if for example:
- you’ve accessed any of your pension savings flexibly and so are subject to the money purchase annual allowance of £4,000
- your adjusted income is over £240,000 a year.
You can find more information about the annual allowance and the exceptions to the limit in our help and support.
The maximum contribution could be in the form of regular payments, one-off lump sum or a combination of both. The limit includes the contributions paid into all of your pensions (if you have more than one), includes your personal contributions, tax relief and any contributions that are paid by your employer.
You can also carry forward unused allowance from previous tax years (see Q&A below).
You also need to consider the lifetime allowance rules where there is also a total amount of all your pension savings that can be built up over your entire working life without triggering a tax charge. The lifetime allowance for the 2021/2022 tax year is £1,073,100. Some people may have registered for tax protection with HM Revenue & Customs in the past; but otherwise, you may be charged if you go over this limit. If you think this may apply to you, you should obtain financial advice.
Can I carry forward unused allowance from previous tax years?
Yes this is possible. Carry forward allows you to make use of any annual allowance you may not have used during the 3 previous tax years, provided that you were a member of a registered pension scheme.
You can use carry forward if you’re an active member currently building up pension savings; a deferred member with paid-up pension benefits; a pensioner member, in receipt of pension benefits from your pension scheme, or a pension credit member, where you have a share of your ex-partner’s pension scheme. Carry forward may be particularly useful if you’re looking to make large pension contributions.
To use carry forward, you must pay in more than the maximum contribution in the current tax year (£40,000 in 2021/2022) and can then use unused annual allowances from the 3 previous tax years, starting with the tax year 3 years ago.
You can’t receive tax relief on contributions in excess of your earnings in the current tax year and you only receive tax relief over the basic rate to the extent that you’ve paid it.
You can use the pension annual allowance calculator on the government’s website to see how much you can carry forward.
We recommend that you take financial advice before making a carry-forward contribution.
How much tax relief do I get on my pension contributions?
Tax relief is available on your pension savings up to a standard limit known as the annual allowance, but this is dependent on how much you earn. The annual allowance includes all your pension contributions, tax relief and your employer’s contributions (across all your pension arrangements). The annual allowance for the current tax year is £40,000 – but those who’ve already taken any money out of their pension savings or earn over £240,000 may have a lower annual allowance limit. If you go over your annual allowance limit you’ll normally have to pay tax on the excess – but in some cases you can carry forward any unused annual allowance from the previous 3 tax years, which may reduce the tax charge.
Under HM Revenue & Customs (HMRC) rules, each tax year you can receive tax relief at your highest marginal rate of tax on 100% of your relevant UK earnings (up to the annual allowance) or £3,600 gross (£2,880 net) – whichever is higher. Relevant UK earnings are usually those earnings which are subject to UK income tax. If you are classed as a Scottish taxpayer, you may pay different tax rates to that of the rest of the UK. For more information please visit HMRC’s webpage on the income tax in Scotland.
How long does it take to get the tax relief from HM Revenue & Customs (HMRC)?
If your employer is using the ‘net pay arrangement’ method where your contributions are taken from your pay before tax, you’ll get your full tax relief straightaway.
If your employer is using the ‘relief at source’ tax arrangement where your contributions are deducted after tax, we’ll automatically claim tax relief for you, adding the basic tax rate of 20% to your pension contributions. We can receive this payment for tax relief from HMRC up to 12 weeks after your contributions are made into your pension pot.
If you pay over basic rate tax, we can’t comment on how long it takes to receive the extra tax relief – you’ll need to contact HMRC.
If you’re unsure whether your contributions are deducted before or after tax, you can find this on your joiner information, or please contact your employer.
If tax relief on my pension contributions for this tax year is received on or after 6 April 2022, which tax year would it apply to?
As it could take up to 12 weeks for HM Revenue & Customs (HMRC) to pay us your tax relief, you may encounter a situation where a tax relief payment for one tax year is received in the next.
For example, tax relief for February and March 2021/2022 tax year may be received on or after 6 April 2022 which would be in the 2022/2023 tax year. So, you’d need to be aware that although this has been received in the new tax year, for HMRC purposes, it still applies to the previous tax year 2021/2022.
What are the net pay and relief at source tax relief options?
When your employer set up your workplace pension, they needed to choose from 1 of 2 tax relief methods:
- They may have set it up so that your contributions are deducted from your wages after tax. HM Revenue & Customs (HMRC) refer to this as the ‘relief at source’ method (we call this the net tax basis). When your employer signed up to The People’s Pension, we’d have automatically set them up on the relief at source method and reclaimed basic rate tax relief from HMRC on your behalf. If you pay a higher rate of tax you need to claim this from HMRC.
- Or they could have set it up, so your contributions are deducted from your wages before tax. HMRC refer to this as the ‘net pay arrangement’ method (we call this the gross tax basis). This means you automatically get full tax relief on your contributions straightaway, regardless of the rate of tax you pay, or whether you live in Scotland or elsewhere in the UK. For ‘net pay’ arrangements, employees who don’t pay income tax will not receive tax relief from the government on pension contributions and they won’t be able to claim this back.
Relief at source is our default tax relief method and an option that not all pension providers offer. So, when your employer set up your workplace pension with The People’s Pension, we’d have automatically set them up on this method, unless they told us otherwise.
Visit our webpage for more about how tax relief works for you.
How do I apply for tax relief?
If your employer is using the ‘net pay arrangement’ method where your contributions are taken from your pay before tax, you’ll get your full tax relief straightaway and you don’t need to do anything.
If your employer is using the tax ‘relief at source’ arrangement where your contributions are deducted after tax, we’ll automatically claim tax relief for you, adding the basic tax rate of 20% to your pension contributions. This is subject to you meeting all the conditions for tax relief to be granted. If you live in Scotland and you pay the Scottish starter rate of income tax at 19%, tax relief granted will be 20% and you won’t have to repay the difference. If you pay more than 20% in tax, then you need to claim back the extra tax relief directly from HM Revenue & Customs (HMRC). See ‘How do I claim tax relief above basic rate on my contributions?’ below or visit HMRC’s website for more details.
For more about tax relief visit our webpage on pension tax.
How do I claim tax relief above basic rate on my contributions?
If your pension contributions have been deducted from your net pay (after tax has been deducted) and you pay more than 20% tax, you can claim your tax back in 2 ways:
- self-assessment tax return
- call or write to HM Revenue & Customs if you don’t fill in a tax return.
If you’re an additional rate taxpayer (ie you earn over £150,000 per year and pay 45% tax on this portion), you can only claim your 25% extra via a self-assessment tax return.
HM Revenue & Customs will normally require higher earners to submit a self-assessment tax return as the only method for claiming their extra tax relief. If you’re unsure about whether you need to submit a self-assessment tax return, please contact HM Revenue & Customs.
If you have any queries on how to claim higher rate tax relief, see www.gov.uk/tax-on-your-private-pension/pension-tax-relief.
How do I complete my self-assessment tax return to claim back higher rate tax relief?
If you’re already registered for self-assessment, HM Revenue & Customs will send you a tax return to fill out each year. If you haven’t registered for self-assessment, you’ll need to sign up first via the HMRC website which can take up to 20 working days. You’ll then be sent a letter that contains your unique taxpayer reference, which you use to enrol for the self-assessment online service. HMRC will then send you an activation code by post a few days later so you can sign into your online account and file your return.
You’ll need to ensure you have the following information to hand to complete your self-assessment:
- P60 or P45 form from your employer
- A recent payslip
- Your National Insurance number
- Your pension annual statement (you can view your latest statement in your Online Account)
You then need to complete the box ‘Payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider (called relief at source). Enter the payments and basic rate tax’ where you enter the gross amount (what you’ve paid plus the basic rate relief you’ve already received). You don’t need to include your employers’ contributions and any contributions taken from your pay before it was taxed.
HMRC will tell you how much tax you’ll get back.
I’ve forgotten to claim higher rate tax relief on my pension contributions last tax year – what do I do?
Don’t worry, you can write to your local tax office up to 4 years after the end of the tax year in which you made your contributions and reclaim your extra tax relief.
How do I query the tax I’ve paid on my lump sum payment?
If you have any queries about the tax you’ve paid, or if you think you’ve paid too much tax, you can contact HM Revenue & Customs (HMRC). If you’re due a refund you’ll need to complete either a P50Z, P53Z or P55 form depending on your personal circumstances. You can contact HMRC on 0300 200 3300 or click on www.gov.uk/government/organisations/hm-revenue-customs to find the form you need.
What’s emergency tax?
If you’re taking a payment/cash lump sum from your pension pot (and you’re not taking your pot under the small pension pot rules), the first payment will be taxed using an emergency tax code. It ensures that you receive the basic personal allowance and it also assumes you’re entitled to 1/12th of this allowance each month, but doesn’t take into account any other allowances or reliefs you may be entitled to. We’ll keep using the emergency tax code until HM Revenue & Customs (HMRC) tells us (and you) what your correct tax code should be. This means the amount you receive from us may not be the full amount you’re due, and you can reclaim this from HMRC.
We’ll confirm the details of this payment, so you can reclaim any overpaid tax from HMRC.