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Turn £5,500 into as much as £10,000

Here's how it works:

Step 1. You invest £8,000 into your pension. This is called the net amount. £8,000
Step 2. The government adds £2,000 to the amount you invest. This is 20% basic rate tax relief and is the gross amount you invest. £10,000
Step 3. If you are a higher rate taxpayer, you claim 20% more tax relief on the gross amount through your tax return. £2,000
Step 4. If you are an additional rate taxpayer, you claim an additional 5% tax relief on the gross amount through your tax return. £500

The total amount invested in your pension is £10,000. If you are a higher rate taxpayer, the amount you pay, after tax relief is £8,000 minus £2,000 i.e., £6,000. If you are an additional rate taxpayer the amount you pay, after tax relief is £8,000 minus £2,500 i.e. £5,500.

Other tax benefits

  • Your pension grows free from income tax and capital gains tax – although tax deducted from dividends can’t be reclaimed.
  • 25% of the value of your pension fund can usually be taken as a tax-free lump sum when you retire. The remainder is used to provide you with a taxable income.
  • Any money left in your pension when you die can usually be passed to your chosen beneficiaries free of inheritance tax. If you die before 75, any withdrawals they then make will be tax-free. If you die at 75 or older, any withdrawals will be taxed as their income.

Pension and tax rules are subject to change. Tax reliefs depend on your personal circumstances.

How much you can invest in your pension

There’s no limit to the amount you can invest into a pension each year. However, tax relief will only apply to the lower of your earnings and the annual allowance (£40,000 for tax year 2020/21). For example, if you earn £40,000 a year, contributions of up to £40,000 gross will be eligible for tax relief.

If you don't have any earnings - perhaps you’re retired or not working - you can still contribute up to £3,600 gross p.a. (£2,880 excluding tax relief in 2020/21).

Your tax free pension funds are limited by the lifetime allowance. Basically, this is the total value of all of your pensions when you retire. The lifetime allowance for 2020/21 is £1,073,100. If your total pension funds are in excess of the lifetime allowance at retirement you will have to pay tax on the balance.

Here’s an idea:
Why not think about investing £2,880 in a pension for a child or grandchild. The government will add another £720, taking the total amount to £3,600. You can do this every year if you want and there’s plenty of time for the funds to grow because they’ll be locked away until retirement.

CommShare doesn't give investment advice. If you're unsure about suitability, you should seek professional advice. Past performance of an investment is not a guide to future performance. The value of investments or income from them can go down as well as up. You might not get back the amount you invest. Current tax levels and reliefs will depend on your individual circumstances.

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CommShare Ltd is Authorised and Regulated by the Financial Conduct Authority.