Pensions: the most generous tax relief around?

I have been professionally involved with pensions for 24 years. 

I have lost count of how many times rules have changed over that period – usually not for the best. 

Yet, despite all the tinkering, overly complex rules and restrictions, pensions still offer one of the most generous sets of tax relief available, in my view. 

You could get up to 45% tax relief on the way in, tax-free growth whilst your money is invested and up to 25% tax-free cash when you take money out. Plus, pensions are not typically subject to inheritance tax, which many could find appealing. 

With fiscal pressure at a record high this array of tax reliefs could make pensions particularly attractive.

Please note: this article gives a very concise overview of complex rules and doesn’t cover all scenarios or exceptions – for example, it does not cover the tax relief position in Scotland, nor the rules for defined benefit pensions. If you are unsure how the rules may apply to you, please seek specialist advice. Tax rules can change and benefits depend on circumstances. 

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Pensions are long-term investments: you cannot normally access your funds before age 55 (57 from 2028). Before making any contributions you should check you are eligible.

Up to £4,500 income tax relief for every £10,000 invested

The income tax relief when you invest could be a real boon, especially at a time when a record 6.5 million people face paying the higher and top rates of tax. 

For most investors under age 75, when you make a payment of £8,000 to a pension, the government automatically adds £2,000 (20%). In addition, if you are a higher or top-rate taxpayer you can claim back up to an extra 20% or 25% respectively. The higher the rate of tax you pay, the more tax relief you could receive.

The result is remarkable: a £10,000 contribution could effectively cost a higher-rate taxpayer as little as £6,000, reducing to £5,500 for a top-rate taxpayer.

You pay The taxman adds Total invested
£2,880* £720 £3,600
£8,000 £2,000 £10,000
£16,000 £4,000 £20,000
£48,000 £12,000 £60,000

*This is the maximum contribution for non-earners.

Tax rules can change and benefits depend on circumstances.

You pay The taxman adds Claim back up to an extra Total invested Effective cost of as little as
£8,000 £2,000 £2,000 £10,000 £6,000
£16,000 £4,000 £4,000 £20,000 £12,000
£48,000 £12,000 £12,000 £60,000 £36,000

Tax rules can change and benefits depend on circumstances.

You pay The taxman adds Claim back up to an extra Total invested Effective cost of as little as
£8,000 £2,000 £2,500 £10,000 £5,500
£16,000 £4,000 £5,000 £20,000 £11,000
£48,000 £12,000 £15,000 £60,000 £33,000

Tax rules can change and benefits depend on circumstances.

If you are a UK resident under age 75 and have an earned income, you should be able to benefit in some measure: in many cases, this tax year you can contribute as much as you earn, capped at £60,000 – and you could benefit from up to £27,000 tax relief. 

There are situations when the maximum you can contribute is lower – and consequently so is the tax relief you could receive. 

Broadly speaking, you can contribute progressively less when your “adjusted income” (your income plus any money you or your employer have added to your pension) is more than £260,000. Once it reaches or exceeds £360,000, you can contribute a maximum of £10,000 – read more in our Tapered Allowance factsheet.

Bear in mind, too, it may also be possible to make pension contributions over your Annual Allowance by ‘carrying forward’ unused allowance from the previous three tax years – read more in our Carry Forward factsheet.

A reduced £10,000 limit, known as the Money Purchase Annual Allowance or MPAA, may also apply if you have taken taxable money out of your pension since 2015, using the pension freedoms – read more in our Money Purchase Annual Allowance factsheet.

Despite the allowance being far less generous, if you have earnings to support it you could have £10,000 invested and working for you at an effective cost of as little as £5,500. 

If you don’t have any earnings, or earn less than £3,600 a year, you should still be able to contribute up to £3,600 this tax year – a payment of £2,880 to which the government adds £720 basic tax relief. 

No Lifetime Allowance – why might it still matter?

The Lifetime Allowance previously set the limit of total value that could be built up in pensions without incurring a tax charge. It has been abolished from 6 April 2024.

In theory, this means there are no longer limits on how large a pension you can build. However, in practice, the rules are not as straightforward for those wishing – and able to – build a large pension, as new rules have been introduced, limiting the total amount of tax-free cash you can take in your lifetime and you can pass on when you die.

A new Lump Sum Allowance (LSA), effective from 6 April 2024, limits the tax-free cash you can get from your pension to £268,275. Meanwhile, a second new allowance, the Lump Sum and Death Benefit Allowance (LSDBA) – also effective from 6 April 2024 – limits the total amount of tax-free cash you can take in your lifetime and you can pass on when you die to £1,073,100, in most cases. 

So, if you build a large pension, a greater proportion may be taxed when you take the money out, making pensions progressively less tax efficient, the larger the pot you build. Different limits may apply if you have previously applied for Lifetime Allowance Protection (you should have a certificate from HMRC to this effect or can check via your online HMRC account). If you have protection, it could be sensible to take advice before making any decisions that could impact it.

Investment ideas for your pension 

Once you decide to contribute to a pension, the next question is probably where to invest. 

We have two ready-made investment ideas for you to consider: the Quality Shares Portfolio and the Wealth Club Portfolio Service. Both are designed specifically for wealthier and more experienced investors and are exclusive to Wealth Club. We manage the portfolios for you but the service is not personal investment advice.

Note: these discretionary managed portfolios are long-term investments which can fall as well as rise in value and returns are not guaranteed.  Currently, these two ideas are not available if you are in drawdown or intend to take benefits from the pension soon, however we are working on making these options available.

Quality Shares Portfolio

The Quality Shares Portfolio, managed by Charlie Huggins, gives you exposure to 15-20 global businesses chosen by him for their resilience, financial strength and pricing power – see examples.

It is profoundly different from any other investment you might hold in two key respects. The first is the level of information, insight and transparency it provides (you can see an example investor update here). The second is in the investing approach itself – see more on Charlie’s investment philosophy.

You can invest in the Quality Shares Portfolio via the Wealth Club SIPP (Self Invested Personal Pension), from just £10,000 (gross). 

Wealth Club Portfolio Service

The Wealth Club Portfolio Service is a collection of five well diversified investment portfolios we manage for you based on the level of risk you choose for yourself.

Each portfolio includes a diverse mix of 30–45 actively managed and low-cost index funds as well as investment trusts. They give you exposure to equities and bonds from around the world, but also infrastructure and other private assets – we are not aware of any similar service that can match this.

They are the type of portfolio a private bank or wealth manager might build for you – but without the hefty price tag. In fact, you could pay around 40% less than you would if you used an adviser and roughly the same if managing a typical fund portfolio yourself on a DIY platform.

You can invest in the Wealth Club Portfolio Service via the Wealth Club SIPP. The minimum investment in aggregate (across SIPP, ISA and GIA) is £100,000. 

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.