Receiving tax relief on pension contributions into a workplace pension is a great way to help prepare for retirement. In addition, contributions from your employer can make the pension savings even greater.
If you are automatically enrolled into a workplace pension a percentage of your earnings is paid into your pension fund each payday. Your employer must also contribute if you meet the automatic enrolment rules, with minimum contributions currently set at 3% from the employer and 5% from the employee, giving a total minimum contribution of 8% of qualifying earnings. Some employers also choose to contribute more than the legal minimum.
The way you receive tax relief depends on how your workplace pension operates. Under a net pay arrangement, pension contributions are deducted before Income Tax is calculated, meaning you receive tax relief automatically at your highest rate.
Under relief at source, contributions are taken after tax, and your pension provider claims basic-rate tax relief from HMRC. Higher and additional-rate taxpayers may then be able to claim extra tax relief through their self-assessment tax return or by contacting HMRC.
Some employers also offer salary sacrifice, where you agree to exchange part of your salary for an employer pension contribution. This can reduce both Income Tax and National Insurance contributions for you and your employer.
Before opting out of a workplace pension, it is worth considering the value of employer contributions and tax relief, with some care as these benefits can significantly increase your retirement savings over time.
