Website of the UK government

How tax relief on personal pensions works

For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

If you pay a higher tax rate

If you're on the higher tax rate of 40 per cent, you'll still get 40 per cent tax relief for any money you put into your pension. But the way that the money is given back to you is different:

• 'Personal Pensions – your guide' (PDF document, 126K) Opens new window
• Help with PDFs

Can non-taxpayers get tax relief?

If you don't pay tax, the most you can pay in with tax relief is £2,880 a year. But you'll still get basic rate (20 per cent) tax relief. In other words the government will 'top up' your contribution to make it £3,600.

• More about low income and pensions Opens new window

Limits on pension tax relief

You can save as much as you like into any number of pensions and get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an 'annual allowance'.

For the tax year 2008-2009 this is £235,000 and tax year 2009-2010 it is £245,000. (Savings above the annual allowance and a separate 'lifetime allowance' will be subject to tax charges). To find out more, read about new pension rules from April 2006.

• Pension rules from April 2006

Other tax advantages

There are more tax advantages to having a pension scheme:

Pension fund growth

Your pension fund will invest the money you save (including the tax relief amount) in your pension. Your pension fund growth may be free of tax.

Capital gains tax

Any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains and is tax-free.

Withdrawing funds as a retirement lump sum

When you come to take benefits you may be able to draw out up to a quarter of the value of your stakeholder or personal pension fund as a tax-free lump sum. Your pension provider will be able to tell you whether or not you will be able to do this.

• Options when you take your personal pension

If you want to put money into someone else's personal pension

You can put money into someone else's personal pension – like your husband, wife, civil partner, child or grandchild's. They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill. If they've got no income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief).

For example, if you put £80 into a spouse or civil partner's pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.

• Passing money to your children and grandchildren
• Inheritance Tax

More useful links

• Understanding the basic State Pension
• Choosing and using a pensions adviser