The government wants people to actively save for retirement and one way in which they encourage us to do this is using the incentive of tax reliefs.
Different types of pensions are given tax relief in different ways:
There are three types of pensions:
1. Occupational Pensions
2. Public Service Pensions
3. Personal Pensions
Occupational and Public Service Pension Tax Relief
If you are a member of an occupational or public service pension, your employer will normally make pension contributions on your gross salary (the amount of your wage before any tax is deducted). This means that you are receiving the pension tax relief immediately.
Doctors and dentists are taxed as if they are self employed and can claim their relief through their tax return.
When you contribute to a personal pension you are doing so with money that has already been taxed. Therefore to obtain your tax allowance the pension provider company will claim back from the government the basic rate of tax (20%). This means that for every £80 you contribute to your private pension you actually end up with £100 in your pension fund. If you are a higher rate tax payer (anyone paying 40% tax), you will need to claim the extra relief on a tax return.