Our resident pensions expert explains how the system works
Thursday 05 Mar 2020 Author: Tom Selby

Under a ‘relief at source’ arrangement how much money do I need to pay into my SIPP (from taxed income) to take advantage of the full annual pension allowance of £40,000? Is it £40,000 or some lesser amount?


Tom Selby, AJ Bell Senior Analyst says:

If you save in a pension you are entitled to tax relief on your pension contributions at the rate you pay income tax. So if the contribution is from earnings taxed at 20%, you should receive 20% tax relief, while if the contribution is from earnings taxed at 40%, you are entitled to 40% tax relief, and so on.

Most people can contribute up to £40,000 a year into their pension, although you cannot personally pay in more than 100% of your UK earnings. This means if you earn £30,000 a year, for example, the annual pension contributions you personally pay are capped at £30,000. Employer contributions aren’t capped by your earnings, but do count towards the £40,000 annual allowance.

You can read more on the annual allowance and the circumstances where it might be lower than £40,000 here.

Non-earners are also allowed to pay up to £3,600 a year into a UK pension.

‘Relief at source’ vs ‘net pay’

There are two different ways you can be paid tax relief: via ‘relief at source’ or ‘net pay’.

In a relief at source scheme, such as a SIPP, your contributions will automatically be topped up by 20% tax relief. That means if you pay in £80, your contribution will be increased to £100.

If you are a higher or additional-rate taxpayer, you can claim extra tax relief via self-assessment, which will be paid through an adjustment to your tax code.

To take advantage of the full £40,000 annual allowance available in the current tax year in a relief at source scheme, you need to pay in £32,000, with the extra £8,000 (i.e. 20% tax relief) added by your scheme.

It’s worth noting that you can also ‘carry forward’ unused allowances from any of the three previous tax years to the current tax year, meaning you could potentially make a total contribution inclusive of tax relief of £160,000 – although contributions will still be capped at 100% of your UK earnings.

Net pay schemes, on the other hand, take contributions straight from your pre-tax salary, meaning your tax relief is effectively added automatically. The exception to this is people who pay 0% tax – i.e. those earning below the £12,500 personal allowance – as they’ve paid no tax, they receive no tax relief through this method and so are not guaranteed to receive an equivalent tax relief entitlement.


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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