Will I still get my pension contributions tax-free?

admin
3 February 2015

Q

I am in the process of taking voluntary redundancy. Am I able to make a payment into my pension at this stage? If so, what would be the maximum allowed for this year and could I take a 25% lump sum on redundancy and the rest be used to boost my monthly pension figure? If I am able to make a one off-payment, will the 20% tax allowance be added into my pension pot making this a very tax-efficient payment?
From
VB via email

A

Redundancy payments arising from “loss of office”, which are not contractual or expected, or not in return for services, are tax-free on the first £30,000. This includes voluntary redundancy.

However, where the payment is into a registered pension scheme by your employer for your benefit, you can receive tax relief on contributions up to a maximum of 100% of your earnings, subject to a maximum contribution of your annual allowance a year.This is provided your pension fund is not greater than your lifetime allowance, which is currently at £1.25 million.

You can take advantage of any unused annual allowance from the previous three tax years, bringing your annual allowance to a maximum £190,000.

For example, if your employer makes a contribution of £10,000 into your pension savings, you will suffer a net contribution of £8,000, assuming you are a basic-rate taxpayer or £6,000 if you are a higher- rate taxpayer. Your pension provider should be able to tell you how much annual allowance and lifetime allowance you will have left.

You don't usually have to claim tax relief on pension contributions – you will get it automatically if either you're in a workplace pension and your employer takes contributions out of your salary before deducting income tax or your pension provider claims tax relief for you at a rate of 20% and adds it to your pension savings. This is called 'relief at source'.

You get relief at source in all personal and stakeholder pensions and some workplace pensions. Where your employer has issued your P45 and then makes a contribution into your pension fund, no tax relief is given at source and you will have to make the claim through self-assessment.

You may be able to claim tax relief on pension contributions if you pay income tax at a rate above 20% and your pension provider claims the first 20% for you (relief at source) or your pension scheme isn't set up for automatic tax relief or someone else pays into your pension pot. However, you will need to complete a self-assessment tax return to get this tax back.

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David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy