Finding higher than marginal rate tax relief
Jessica Amodio
Partner & Independent Financial Adviser at GDA
When it comes to pension tax relief, many people assume it's as simple as getting 20%, 40% and 45% relief based on their tax band. However, the way you make pension contributions can impact the amount of tax relief you receive. In some cases, you may be able to get more tax relief than just your marginal rate - especially if you receive income in different ways, such as salary or dividends.
Here’s a breakdown of how tax relief works and how your circumstances can affect what you receive.
Tax relief at source
Your pension contributions are taken from your income after tax has been deducted.
Your pension provider then claims 20% tax relief from HMRC and adds it to your pension.
If you’re a higher or additional rate taxpayer, you may need to claim extra relief through your tax return.
Tax relief on a net pay basis
Your pension contributions are taken from your gross salary before tax is deducted.
This means you automatically receive tax relief at your highest rate straight away.
This method is commonly used for workplace pension schemes.
Tax relief by making a claim to HMRC
If you make additional contributions to your pension outside of payroll, you may need to claim extra tax relief through a self-assessment tax return.
How your income affects tax relief
The amount of tax relief you receive depends on how your pension contribution affect your taxable income. Two people earning the same amount receive different levels of tax relief based on whether their income comes from salary or dividends.
Client A (Salary Earner)
Employed with income paid as salary.
Contributes £10,000 to their pension (from earnings taxed at the higher rate of 40%).
£8,000 is paid in, and the pension provider adds £2,000 in based tax relief (20%).
The £10,000 pension contribution extends their basic rate tax band, meaning that an additional £10,000 of their salary is now taxed at 20% instead of 40%.
Total tax relief: 40% (20% from the pension provider and 20% from the reduced tax on salary).
Client B (Company Director with Dividends)
Company director with income paid as dividends and a small salary.
Contributes £10,000 to their pension (from dividends taxed at the higher rate).
£8,000 is paid in, and the pension provider adds £2,000 in basic tax relief (20%).
The £10,000 pension contribution extends the basic rate tax band, reducing the tax rate on some dividends.
Total tax relief: 45% (20% from the pension provider and 25% from the lower tax on dividends).
What this means for you
If you earn income through salary or dividends, understanding how tax relief works can help you maximise your pension savings. You may be able to reduce the tax you pay now while boosting your pension for the future.
If you’d like tailored advice on how to make the most of pension tax relief, speak to your financial adviser or get in touch with the GDA team – we’d be happy to help.
This article is for general information and does not constitute personal financial advice. If you’re unsure what’s best for you, seek independent financial advice.
