The annual limit to how much can be paid into personal pension schemes has been reduced steadily over the last few years in a bit to cap the cost to the government of tax relief especially to the well off. It now stands at £40,000 grossed up a year but this does still represent £16,000 of tax relief to 40% higher rate tax payers, or 66.7% of the net payment of £24,000 required to achieve the £40,000 gross pension contribution. If Labour win the next election they have confirmed that they will remove higher rate tax relief so that instead the relief will be reduced to basic rate only so to a rather more moderate £8,000. Depending on your political leanings that may be quite an incentive to topping up your pension pot before the election.
If you are a bit puzzled by the maths on the tax relief it works like this –
Basic rate relief – net payment required to achieved £100 gross pension contribution
net payment made £80
20% tax credit added directly to your pension £20
Gross payment £100
Relief as percentage of net payment (20/80) = 25%
Higher rate relief – net payment required to achieve £100 gross pension contribution
net payment £60
20% tax credit added directly to your pension £20
20% tax credit claimed via tax return £20
Gross payment £100
Relief as percentage of net payment (40/60) = 66.7%
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