Tax
While you’re saving
You don’t pay tax on what you pay in
Paying into a pension plan is a tax-efficient way to save for your retirement. This means you don’t pay tax on your contributions, so more money goes into your pension than it would if you took the same amount as pay.
For example:
- If you’re a basic rate taxpayer, every £1 that you pay towards your pension only costs you 80p.
- If you’re a higher rate taxpayer, every £1 that you pay towards your pension only costs you 60p.
You can also save on National Insurance
If you make contributions by SMART – the salary sacrifice arrangement – you make National Insurance savings too. Your pension contributions are taken off your salary first, so National Insurance is calculated on a lower amount.
The government is introducing a cap on the amount of salary sacrificed contributions that can benefit from National Insurance relief. This will mean that from April 2029, you’ll only make National Insurance savings on up to £2,000 of contributions made through SMART each year.
When you take your benefits
When you take your pension, you can choose to take your full annual pension (paid monthly), or you can exchange part of it for a tax-free cash lump sum, up to £268,275.
You pay tax on the rest of your income from your pension in the same way as you pay income tax when you’re working.