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Payments into an approved pension scheme attract tax relief at your highest rate of tax and are deemed to be paid net of basic rate tax. Contributions attract tax relief to the extent that they do not exceed the available annual allowance.

It is also possible to carry forward unused allowances from the previous three tax years which means that it is possible to make significant tax-relieved contributions to a registered pension scheme.

A basic rate taxpayer will effectively pay £80 for a £100 contribution into a registered pension scheme. For higher rate taxpayers, a £100 pension contribution costs £60 and for additional rate taxpayers, the cost is just £55. This makes pension savings particularly tax-efficient.

Looking ahead – from April 2016 the pensions annual allowance is to be reduced by £1 for every £2 by which adjusted net income (inclusive of pension contributions) exceeds £150,000, subject to a maximum reduction of £30,000.

Example:
John invests £2,000 into his pension scheme, which costs him £1,600 as this is paid net of basic rate tax, which the pension fund recovers bringing the pension contribution to £2,000.

As a higher rate taxpayer paying tax at 40% he claims higher rate tax relief on this and receives a tax rebate of £400 (being the difference between the higher rate relief due of £800 and the basic rate relief already given of £400 (i.e. 20% of £2,000) from HMRC.

Jack is an additional rate taxpayer paying tax at 45%. He too invests £2,000 into his pension scheme, which costs him £1,600 as this is paid net of basic rate tax.

As an additional rate taxpayer he can claim further tax relief of £500 from HMRC, which he receives as a tax rebate. This is 25% of £2,000, being the difference between the basic rate (20%) and the additional rate of 45%.