Setting your retirement income target is the start. The income you receive in retirement will depend upon four factors.

  • How much is contributed
  • How well your investments perform
  • When you retire
  • How you take your income 

The good news is if you are part of your workplace pension the likelihood is your employer will be contributing to the pension for you and one factor you can change is how much you contribute. Additional contributions to your pension account will improve your chance of a better retirement income.

Making contributions to your employer’s pension plan is a tax-efficient way to save for your retirement. You can currently receive tax relief on contributions of up to 100% of your earnings in the United Kingdom. However, if the total contributions paid by you and your employer in a tax year exceed your annual allowance you may have to pay a tax charge.

Tax relief can be applied in different ways as follows:

Net pay arrangement

Your employer deducts your contributions from your pay before it is taxed. Therefore you only pay tax on your earnings after your pension contribution has been deducted. This means you get full tax relief at the highest marginal rate* of income tax that you pay unless you do not pay income tax in the United Kingdom - for example if your earnings are below the current personal allowance.

Salary sacrifice arrangement

You may have the option to participate in a salary sacrifice arrangement (sometimes called salary exchange) whereby contributions are paid by your employer on your behalf. You agree to sacrifice part of your salary and your employer agrees to pay an equivalent amount into your pension account as an employer contribution. Salary sacrifice also reduces your National Insurance payments, if you pay them, and therefore increases your take home pay compared to other methods of making contributions. This means you get full tax relief at the highest marginal rate* of income tax that you pay unless you do not pay income tax in the United Kingdom - for example if your earnings are below the current personal allowance.

Relief at source

Your employer deducts your contribution from your pay after it is taxed. Your pension scheme will then automatically add basic rate tax relief to your pension account when it receives your contribution. If you pay the higher or additional rate of income tax will need to contact HMRC to claim the additional tax relief.

Please refer to your plan information to find out how your employer deducts your pension contribution.

What if I do not pay income tax and my employer uses the net pay arrangement or salary sacrifice?

If your earnings are below the personal allowance or you do not pay income tax in the United Kingdom, you will not benefit from the tax relief a taxpayer would normally receive. However, this does not affect the amount that is paid into your pension and you will continue to benefit from the money that your employer pays in.

What if I do not pay income tax and my employer uses relief at source?

Your pension scheme will automatically add basic rate tax relief to your pension account, irrespective of whether you pay income tax or not.

What if I pay tax at the higher rates and my employer uses relief at source?

Your pension scheme will automatically add basic rate tax relief to your pension account. If you pay a higher rate of tax on some of your earnings you may be entitled to further tax relief.

To claim any money you are still due, you need to complete a self-assessment tax return and submit it to HMRC. For more information, see gov.uk/self-assessment-tax-returns. If you do not complete a tax return please call or write to HMRC - gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees

What is the annual allowance?

This is the limit on the amount of money that can be contributed to all your pension accounts in one tax year and still receive tax relief. For further information please visit - gov.uk/tax-on-your-private-pension/annual-allowance

What is the personal allowance?

This is the amount of money you can earn in one tax year without having to pay an income tax. For further information on income tax rates and personal allowances please visit - gov.uk/income-tax-rates

*Marginal rate means that tax relief is at the rate of income tax you would have paid if you had received income rather than make a pension contribution, therefore your contribution could receive tax relief at different rates depending upon your level of income.

Contact

If you are a member of a pension plan administered by BlackRock, then please contact us at


0345 601 7720

blackrock.pensionsuk@blackrock.com