Tax relief is a great way to increase your pension savings. Depending on your relevant earnings and eligibility, you will receive 20% tax relief on any personal contributions.
If you save £800 in your pension, the government will add £200 to any eligible, personal contributions.
At Chelsea, we will automatically reclaim 20% tax relief on any personal contributions. If you are a higher rate, or additional rate tax payer, you can claim this back through self-assessment.
Firstly, you need to think about relevant earnings.
HMRC defines relevant earnings as employment income, such as pay, wages, bonus, overtime, commission, etc (providing it is taxable under Section 7(2) ITEPA 2003). This can be an important distinction for (for example) a CEO who is being paid the majority of their salary by company dividends.
It may be easier to think about what are not relevant earnings – including pension income, dividends and most rental income.
What your relevant earnings are, will determine your pension allowance.
The amount that you can save into a pension in any given tax year depends on your circumstances. The figure is a combined total across all of your pensions that you are paying into (including tax relief).
1. STANDARD ANNUAL ALLOWANCE: a maximum of £60,000, or 100% of your relevant earnings (whichever is lower)
2. NON EARNER: a maximum of £3,600
If you have taken time off to raise a family, are between jobs, or are receiving income which would not be classed as relevant earnings. You can still save up to £3,600 per tax year. Before tax relief, this is £2,880.
3. HIGHER RATE TAXPAYER AND ADDITIONAL RATE TAXPAYERS – TAPERED ALLOWANCE
The tapered annual allowance only affects you if:
If your threshold income is above £2000,000 you will need to refer to your adjusted income, and your annual allowance could be reduced to £10,000 per year. For every £2 of income over £260,000 you earn, your annual allowance will fall by £1. So, if you earn £360,000 your annual allowance will be £10,000.
Please note that Chelsea does not provide independent financial advice. If you think you have a tapered pension allowance you may wish to seek advice before proceeding.
4. MONEY PURCHASE ANNUAL ALLOWANCE
Once you start to take income from your pension, you trigger the Money Purchase Annual Allowance (MPAA). This allowance was introduced to ensure that there are no potential recycling issues with individuals claiming tax relief on any new contributions made, having just taken their benefits. This is currently £10,000.
Below are some examples of how much you can invest into a pension, depending on some circumstances.
This list is not intended to be exhaustive, so if you are not sure what your annual allowance should be, please seek independent financial advice.
| What are your relevant earnings | What allowance | The maximum you can save into a pension in the current tax year | Maximum amount of basic rate tax relief you will receive | The cost to you, if you invest the maximum amount |
|---|---|---|---|---|
| £0 | Non earner allowance | £3,600 | £720 | £2,880 |
| £40,000 | Standard allowance | £40,000 | £8,000 | £32,000 |
| £60,000 | Standard allowance | £60,000 | £12,000 | £48,000 |
| £80,000 | Standard allowance | £60,000 | £12,000 | £48,000 |
| £295,000 (adjusted income) | Tapered allowance | £42,500 | £8,500 | £34,000 |
| £60,000 (but taken income pension) | Money Purchase Annual Allowance (MPAA) | £10,000 | £2,000 | £8,000 |
1. LIFETIME ALLOWANCE
As of April 2024, the Lifetime Allowance has been scrapped. There is, however, a cap on the amount of tax-free cash you can receive. The standard individual lump sum and death benefit allowance is £1,073,100.
2. CARRY FORWARD
If you have not used your full allowance in the past three years you could use the Carry Forward rule:
| Annual allowance | Total contributions | What can be carried forward? | |
|---|---|---|---|
| 2022/2023 | £40,000 | £20,000 | £20,000 |
| 2023/2024 | £60,000 | £30,000 | £30,000 |
| 2024/2025 | £60,000 | £60,000 | £0 |
| 2025/2026 | £60,000 | £20,000 | £40,000 |
Based on the above, you could carry forward £90,000, meaning you could invest £150,000 in this tax year.
Please be aware, the amount of tax relief you will receive depends on individual circumstances, and this may change over time. You must have been a member of a UK-registered pension scheme in each of the years from which you are carrying forward, even if you have not made contributions. You can only contribute as much as you earn, and receive tax relief.
If you run your own business, the situation is a slightly different.
An advantage of being an incorporated company is that you have the flexibility on whether contributions to your pension are made from the company (as an employer) or as a personal (employee) contribution.
If you want to make the contribution and have the tax relief applied, your will need to earn income to cover the contribution. Please note that dividends do not count towards ‘relevant earnings’.
For example, if you want to make a contribution of £10,000 in a particular tax year, you need to have relevant earnings of at least £10,000. Also note that your basic rate tax relief should be calculated into this figure.
If, however, you want to make the payment as an employer or company contribution, than any amount can be paid into the pension, without the relevant earnings, providing the contributions meet the ‘wholly and exclusively’ test.
Employer contributions are not liable for tax relief and can be deducted as a business expense.
Please be aware that the contribution will count towards your annual allowance, so you may be able to carry forward unused allowances from previous years to allow for a higher overall contribution in a particular tax year, without being subject to an annual allowance charge.
One downside to this is that if the contribution is significant, it will reduce the amount of profit and the amount of dividend that can be paid for the accounting period.
To qualify as an allowance deduction against trading profits, pension contributions have to be made wholly and exclusively for the purposes of the business.
In practice, contributions are normally allowed subject to them being at a reasonable level for the individual concerned.
It’s important to speak to your tax/financial adviser to see whether it’s appropriate to make contributions on this basis.
In the UK alone, there are over 3,000 different funds to choose from, so choosing the right one can feel daunting.
At Chelsea, we have collated a number of different options:
The award-winning VT Chelsea Managed Funds – The VT Chelsea Managed funds offer a complete investment solution. You can choose from one of the four managed funds, based on your requirements and attitudes to risk.
Build a Portfolio – If you are interested in building your own portfolio, why not head over to our Research Hub or read our Build a Portfolio article. Alternatively, you can also use our Viewpoint or Fund Review to help you make an informed decision.
Once you know where you want to invest, there are a number of ways you can invest:
Complete an application form and forward it to us at:
Chelsea Financial Services, St James Hall, Moore Park Road, London, SW6 2JS
Before investing, you should ensure that you have read the key investor documents of the fund(s) you want to invest in to, the pre-sale illustration(s) and the relevant terms and conditions. More details can be found on our dedicated disclosures page.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and the pension and tax rules can change. Whilst we may draw attention to certain investment products, we cannot know which of them, if any, is best for your circumstances and must leave that judgement to you. If you are unsure about the suitability of any investment you should seek professional advice.
