Do I get tax relief from the government?
Yes – the government rewards people for saving into a pension by essentially ‘giving back’ the income tax that you paid when you earnt that money originally. This means the money you contribute to your pension will usually receive a 25% tax top up contribution from HMRC.
1. 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 into their pension, they will receive a £250 tax top up contribution from the government back into their pension.
2. If you are a higher-rate taxpayer, you can claim an additional 25% tax top up contribution from the government, as part of your annual tax return. This means you receive a total 50% tax top up on your contribution. For example, if a higher-rate taxpayer makes a £1,000 contribution into their pension, they will receive a £250 tax top up contribution from the government back into their pension and may claim an additional £250 from the government via their self-assessment tax return.
Remember 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 amount you can get in total from tax top ups is dependant on your individual situation and can change in the future.
Do pensions have high interest rates?
A pension is a savings vehicle, and all the money you put into it gets a massive boost from the government through tax relief. This is the biggest boost of any savings product out there, which makes pensions such a great way to save for later life.
But your money should get another, even bigger boost. Everything that you save up into a pot is then invested. The aim of this is to grow your money more than by leaving it in a bank account. Investing your money sensibly can help it grow by around 5-7% per year on average over the long term. That might not sound like a lot, but if your money grows at 7% every year for 30 years, it would have grown by 760% over that time thanks to compound returns.