Guide

Pension planning for business owners

How a personal pension works

With a personal pension scheme, you make regular payments into a fund, which is invested on your behalf.

Basic-rate tax relief on contributions to personal pension schemes

Your contributions will attract tax relief. Your pension provider can claim this relief back from HM Revenue & Customs (HMRC) at 20 per cent - the basic rate of income tax.

This means that for every £100 you contribute, £125 is actually added to your pension fund. 

If you pay tax at 40 per cent or 50 per cent you can claim the difference between your tax rate and the basic rate of 20 per cent via your Self Assessment return. 

Level of earnings and tax relief

The amount of pension contributions that qualify for tax relief depends on your earnings during any particular tax year. 

If you don’t pay income tax

You still automatically get tax relief at 20 per cent on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:

  • you don’t pay Income Tax, for example because you’re on a low income
  • your pension provider claims tax relief for you at a rate of 20 per cent (relief at source)

If you earn £3,600 or more in any year, you can contribute an amount equal to 100 per cent of your earnings and still get income tax relief, as long as the amount is not more than the annual allowance, which is set every year by HMRC. The annual allowance is currently £40,000.

Read HMRC's guidance on pension schemes and tax relief.

Choosing a personal pension scheme

When choosing a personal pension plan, it's a good idea to shop around and to consider:

  • your current personal circumstances and plans for the future
  • the reputation of the pension provider
  • past results - but take care, past performance is no guarantee of future success
  • penalties and charges that may be made if, for example, you fall ill or take a career break
  • how you pay into it
  • whether you can control how your money is invested