Saving for old age: Can a non-taxpayer get pension tax relief on his contributions?
The good news is that it is possible for a non-taxpayer to get tax relief on pension contributions, but only into certain sorts of pension arrangements.
If you open a personal pension, a self-invested personal pension or a stakeholder pension then contributions of up to £3,600 per year can be made and will attract tax relief at the standard 20 per cent rate, even if you are not in work.
These types of pension deliver tax relief through a system known as ‘Relief At Source’ whereby the pension provider claims the income tax relief directly from HMRC and adds it to your pension.
There is a helpful explanation of this on the website of the Pensions Advisory Service here.
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From your e-mail, I am assuming that the pension you currently have is not one of these but may be a workplace pension, perhaps dating back to a previous employment.
Some of these pensions deliver tax relief under a different system known as the ‘Net Pay Arrangement’. Under this system workers make contributions into the pension direct from their pay-packet before their tax bill is worked out.
This means that the amount paid in to the pension already includes the tax relief. For that reason such schemes do not have a mechanism for claiming tax relief from HMRC on behalf of non-taxpayers such as you.
If your current scheme is not able to give you tax relief then you may wish to consider setting up a different arrangement, for example, by opening a personal pension, as tax relief is a valuable boost to your savings.
It’s unlikely to be worth moving your existing fund, just putting new money in another scheme to get the tax relief. This is on the assumption that you are not receiving employer contributions. Anyone in a similar situation who is getting employer contributions should take the potential loss of them into consideration.
On a closely related topic, these two different methods of delivering tax relief mean that there are actually many thousands of people in work who are non-taxpayers and who are missing out on tax relief.
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These are people who earn at least £10,000 per year and therefore come within the ‘automatic enrolment’ scheme, but who earn under the income tax threshold, set to rise to £11,500 in April 2017.
If their scheme operates ‘Relief At Source’ then there is not a problem because the scheme will claim basic rate income tax relief from HMRC on behalf of the scheme member.
Schemes known as ‘group personal pensions’ generally operate on this basis, as well as some other schemes such as the Government’s NEST scheme.
But if a workplace provider uses the ‘Net Pay Arrangement’, the contribution being made by the member does not get tax relief up front via the pay-packet (because they are a non-taxpayer) and the scheme has no process for claiming tax relief from HMRC.
Because the threshold for automatic entitlement has been at £10,000 for a while, whilst the income tax threshold is due to rise steadily towards £12,500 by the end of this Parliament, many thousands of workers are likely to fall in this gap.
The Government might do something about this in future. But those who are in work and in this income bracket should ask their employer about this issue, as they may otherwise be missing out on valuable tax breaks on their contributions.
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
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