Pension Tax Information
Those people looking for information on how much they will be taxed on their pension will be pleased to know that the government want to encourage people to save for later on in their lives, so have given savers considerable tax breaks.
Most people contribute to their pensions straight from their pay, with this money paid after National Insurance contributions but before tax, making the contributions effectively tax-free.
If you pay into a pension fund separately from your business, your pension provider will claim back the additional money from the government to top up your fund. So someone paying a 20% tax rate will see an extra 20% contributed to their pension fund by the government at the end of the year.
Those who pay tax at the higher rate have to claim the money back themselves, through a tax return form at the end of the financial year.
These contributions are, as you would expect, subject to certain limitations. The contributions may not be more than 100% of the salary you are paid in a tax year, and can’t be above £150,000. This limit was much higher several years ago, and just last year it was £255,000 but the government have been looking to close a tax loophole exposed by the richest.
People who don’t pay any tax can also benefit from tax relief in a different way. Someone who earns £5,000, which is below the tax threshold in the UK, could then contribute £5,000 to their pension which the government will again top up by 20%, to £6,000. This is something often used by people paying into their children and grandchildren’s pensions, as paying into someone else’s pension does not affect your own limits.
Pension funds then allow the withdrawal of 25% in a tax-free lump sum at pension age, currently 55 in the UK, again subject to a certain limit. The limit is currently £1.8million which has risen every year, and anything above this year will be taxed as a normal salary would be. Someone drawing on their pension in old age will also pay tax at the normal rate paid if you were earning the money from a job.
People who invest the money in their pensions will also not pay any tax on capital gains or investment income from within the fund.