Do I qualify for tax rebate on what I’m paying into my pension?
There are two main criteria when assessing whether you will qualify for tax relief on your pension contributions:
- Whether you are considered to be a ‘relevant UK person’
- How much you have already contributed in the year
As you might expect there any many legal technicalities round the qualification for tax relief on personal pensions. In this short article I will provide the salient points, however for an answer specific to your own individual circumstances I suggest you speak to an Independent Financial Advisor, such as Niche Advice Limited.
What constitutes a ‘relevant UK person’ for pension purposes?
A relevant UK person is someone under the age of 75, who, in relation to a tax year meets at least one of the following requirements:
- has relevant UK earnings (see footnote 1) chargeable to income tax for that year;
- is resident in the UK at some time during that year;
- was resident in the UK both:
– at some point for in the five years immediately prior to the year in which the contribution was made (see footnote 2), and
– when they became a member of the pension scheme; or
- they or their spouse, have earnings for the tax year from an overseas Crown employment subject to UK tax.
If a person is not a ‘relevant UK individual’, then they may make contributions into a pension but they would not be eligible for tax relief.
How Much Can Contribute Into A Pension?
The amount you can contribute into a pension(s) is unlimited, however, the amount of tax relief is capped.
The rules that determine the maximum individual contribution that will be eligible for tax relief is the greater of £3,600 or 100% of relevant UK earnings (see footnote 1).
The amount contributed into a pension is also tested against a maximum threshold known as the ‘annual allowance’, currently £50,000 (tax year 2012/13). It may be possible to use the ‘unused’ allowance from the three previous tax years.
The annual allowance would not apply in the year a member dies or becomes seriously ill (where life expectancy is less than a year).
Can I contribute into more than one pension?
Yes, an individual can contribute to any number of pensions and receive tax relief. The combined contribution will be assessed against the annual allowance.
Can I contribute into a pension for someone else?
Yes, for example a parent can make a contribution on behalf of a child or a wife on behalf of her husband.
The eligibility to receive tax relief on the contribution is based on the pension holder and not the donor.
For example, a grandparent could make a contribution and the grandchild would be eligible for tax relief themselves. The fact that the grandparent may not be a ‘relevant UK person’ as they are over the age of 75 is irrelevant.
In the case of a parent to child, if the child does not have UK relevant earnings (see footnote 1) then tax relief is still available subject to a maximum of £3,600 per annum.
Contributions that are from someone other than the pension holder are normally treated as ‘gross payments’ when calculating the annual allowance.
How do I find out more / express my interest?
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Richard Stokes is a partner at Niche Advice Ltd who are Independent Financial and Mortgage Advisers in London.
Tax advice which contains no investment element is not regulated by the FSA. Past performance is not a guide to future performance, and no guarantees are given as to capital growth or income yield. Niche Advice Limited is an Appointed Representative of Julian Harris Financial Consultants, authorised and regulated by the Financial Services Authority. FSA No: 153566 – Individual FSA No:518491. Niche Advice Limited is a Member of The Society of Will Writers. Member No: ST72070608-09.
Footnote 1: ‘Relevant UK Earnings’
- Employment income i.e. salary, bonus, overtime or commission.
- Income derived from a trade, profession or vocation (whether as a sole trader or as a partner).
- Income arising from patent rights and treated as earned income.
- General earnings from an overseas Crown employment, which are subject to UK tax.
Relief is subject to a maximum of £3,600 per annum (tax year 2012/13).
Author: Richard Stokes
Richard Stokes is a partner at Niche Advice who are whole of the market Independent Finance Brokers In London. His role is very much focused on on Mortgage and Insurance products.