It’s effectively free money – so how do you get your tax relief?

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When you take out a pension, the tax man tops it up (this is known as basic rate tax relief at source).

You don’t have to claim it. Your pension provider will do this for you or your employer might take your contributions out of your pay before tax is deducted.

It is worked out on your gross (or after tax relief) contribution. So if you want to pay in £100 to your pension, you only have to part with £80 – with £20 coming in tax relief (at 20%).

You can get tax relief even if you don’t pay tax: If you’re on a career break perhaps having children that should not stop you from paying into a pension. Even if you are not a taxpayer you can get tax relief, but your gross contribution must not be more than £3,600 – which means you pay in £2,880 and the tax man tops this up with a further £720.

You get extra if you pay higher rate tax: However, you will usually have to claim this tax relief by filling in a tax return (if you do not get one, notify HMRC). You can claim a further 20% tax relief if you pay tax at the 40% rate (and have sufficient earnings at this top rate). If you pay 45% income tax you can claim an extra 25% tax relief. This extra tax relief is a tax refund to you and is not automatically paid into your pension.

But tax relief is not unlimited: You can pay in a maximum of £40,000 a year (or your annual earnings if they are lower than this).

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