How much tax relief (tax top-up) you receive from the government is dependent on what tax bracket you are in. However, the money you contribute to your pension will automatically receive a 25% tax top-up contribution from the government.
Remember, if you pay into your pension through your company, you won't receive tax top-ups, as they are a business expense and reduce your corporation tax!
If you are a basic-rate taxpayer, you will receive this 25% tax top-up contribution from the government only.
For example, if a basic-rate taxpayer makes a £ 1,000 contribution to their pension, they will receive a £250 tax top-up from the government back into their pension.
If you are a higher-rate taxpayer, you can claim an additional 41% tax top-up contribution from the government, as part of your annual tax return. This means you receive a total tax top-up contribution of 66%.
For example, if a higher-rate taxpayer makes a £ 1,000 contribution to their pension, they will receive a £250 tax top-up from the government back into their pension.
On top of this, once this taxpayer has submitted their tax return, they will receive an additional £410 in tax relief from the government, credited back to their personal bank account. This means that a higher-rate taxpayer has received a total tax top-up contribution of £ 660 from the government, which is 66% of their £1,000 pension contribution.
Where do these numbers come from?
Tax relief is calculated on your pre-tax earnings. Therefore, when a basic rate taxpayer invests £80 of their take-home pay into their pension, they would have actually earned £100 before tax. This is why the government would add a £20 contribution. Here, the tax relief is 20% of the £100, i.e., £20. But of course, £20 is 25% of £80. This is why we say basic-rate taxpayers get an additional 25% tax top-up contribution, and higher-rate taxpayers get an additional 66% tax top-up contribution from the government.
It's Important to Remember that
If you pay into your pension through your Ltd company, you won't receive tax top-ups, as they are a business expense and reduce your corporation tax. Also, the total amount you can get from tax top-ups depends on your individual situation and may change in the future.