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Tax relief for private pension contributions

You can claim tax relief for your private pension contributions. The annual allowance for tax relief on pensions is £40,000 for the current tax year. There is also a facility to carry forward any unused amount of your annual allowance from the last three tax years if you have made pension savings in those years. There is also a lifetime limit for tax relief on pension contributions. The current lifetime limit is £1.03 million.

You can obtain tax relief on private pension contributions worth up to 100% of your annual earnings, subject to the overriding limits. Tax relief is allowed at your highest rate of Income Tax paid.

This means that if you are:

  • A basic rate taxpayer, you can claim 20% pension tax relief
  • A higher rate taxpayer, you can claim 40% pension tax relief
  • An additional rate taxpayer, you can claim 45% pension tax relief

The first 20% of tax relief is usually deducted by your employer, with no further action required if you are a basic-rate taxpayer. If you are a higher rate or additional rate taxpayer, you can claim back any further reliefs on your Self-Assessment tax return.

The above applies for claiming tax relief in England, Wales or Northern Ireland. There is an interesting regional difference if you are based in Scotland. If you are a Scottish taxpayer paying Income Tax at the starter rate of 19%, you can still claim tax relief of 20% and are not required to pay back the difference. As with the rest of the UK, basic rate taxpayers in Scotland pay 20% Income Tax and qualify for 20% pension tax relief. There are also three higher rates, an intermediate rate of 21%, a higher rate of 41% and an additional rate of 46% where further tax relief can be claimed.

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State Pension update for recipients living in the EU

If you live or move abroad, you are entitled to claim the State Pension if you have met the necessary qualifying criteria. This is based on your UK National Insurance record. You require a minimum of 10 years of UK National Insurance contributions to be eligible for the new State Pension. The New State Pension can be claimed if you reached your State Pension age on or after 6 April 2016.

If you reached the State Pension age before 6 April 2016, you will continue to receive the Old State Pension and not the New State Pension. The Old State Pension is made up of two parts, the basic State Pension and the additional State Pension. Both the basic and New State Pension payments are up-rated annually by either 2.5%, average wage growth or by prices growth as measured by the Consumer Price Index – whichever is highest.

In a recent announcement by the Work and Pensions Secretary, Amber Rudd, it has been confirmed that recipients of a UK pension living in the EU will continue to have their payments up-rated until March 2023, in the event of a no-deal Brexit.

This announcement should offer some comfort to almost 500,000 UK pensioners living in the EU. The Government has also confirmed that during this 3-year period they would seek to negotiate a new arrangement with the EU to ensure that up-rating continues.

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What you can do with your pension pot

Pension Wise is a free government service that was launched in 2015 to help provide individuals with general pension advice. However, the service does not answer specific questions relating to your pension. The main advice the service provides is generic and covers what you can do with your pension pot, the different pension types, how they work and what’s tax-free and what’s not.

The website lists the following six options:

  1. Leave your whole pot untouched – You don’t have to start taking money from your pension pot when you reach your ‘selected retirement age’. You can leave your money invested in your pot until you need it.
  2. Guaranteed income (annuity) – You use your pot to buy an insurance policy that guarantees you an income for the rest of your life – no matter how long you live.
  3. Adjustable income – Your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.
  4. Take cash in chunks – You can take smaller sums of money from your pot until you run out.
  5. Take your whole pot in one go – You can cash in your entire pot.
  6. Mix your options – You can mix different options. Usually, you would need a bigger pot to do this.

We would like to remind our readers that you can usually take 25% of your pension pot as a one-off lump sum without paying tax, but the remaining 75% is subject to Income Tax. Aside from the special tax-free benefits, pension income is treated as earned income for Income Tax purposes.

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Tax on a private pension you inherit

Private pensions can be an efficient way to pass on wealth, but it is important to consider what, if any, tax will be payable on a private pension you inherit. The person who died will usually have nominated you by telling their pension provider that you should inherit any monies left in their pension pot. If the nominated person can’t be found or has since died, the pension provider may make payments to someone else instead.

In general, if you inherit a private pension and the owner of the pension fund died before the age of 75, the benefits left in a private pension can be paid as a lump sum or drawdown income to you, with no tax to pay. If the deceased passed away after the age of 75 the pension will be taxed at your marginal Income Tax rate, so 20% if you are a basic rate taxpayer or 40% if you are in the higher tax bracket and 45% if you pay tax at the top rate. The rates may differ if you are a Scottish taxpayer.

There are restrictions on pensions from a defined benefit pot (usually workplace pensions). In these cases, the pension can usually be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. This rule can sometimes be changed if the pension fund allows, but the inheritance will be taxed at up to 55% as an unauthorised payment.

Take advice if you are in receipt of a relative's pension pot

The rules on inheriting a pension are complex and depend on what type it is and how old the holder was when they died. For example, you may also have to pay tax if the pension pot owner was under 75 but had pension savings worth more than £1,055,000 (the lifetime allowance) when they died. There are also important time limits that must be followed. It is also possible for a private pension you inherit to be passed down to future generations, IHT free. We can help you understand your options. Please note that the rules are different for inheriting a State Pension.

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Carry forward of unused pensions allowance

The annual allowance for tax relief on pensions has been fixed at the current level of £40,000 since 6 April 2014. Since April 2016, the annual allowance has been further reduced for high earners. Those with income in excess of £150,000 will usually have their allowance tapered. For every £2 their income exceeds £150,000 the annual allowance is reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.


However, any unused annual allowance can usually be carried forward to the current tax year and added to the current year’s annual allowance. The calculation of the unused annual allowance that can be carried forward can be complicated especially for those subject to the tapered annual allowance. There were also special transitional rules for tax year 2015-16 to align existing and new pension input periods known as the post-alignment and pre-alignment tax year. This meant that from the start of the 2016-17 tax year all pension input periods have been tax year based.


For the tax years 2016-17 to 2018-19, individuals can carry forward any annual allowance that they have not used in the previous four tax years to the current tax year, as follows.



  • For tax year 2016-17 – from the post-alignment tax year, the pre-alignment tax year, 2014-15, 2013-14.

  • For tax year 2017-18 – from 2016-17, the post-alignment tax year, the pre-alignment tax year, 2014-15.

  • For tax year 2018-19 – from 2017-18, 2016-17, the post-alignment tax year, the pre-alignment tax year.

It is usually not possible to carry forward any unused annual allowance from the post-alignment tax year. Typically, this means individuals can carry forward unused allowance from up to three of the four previous tax years.