The actual amount you can pay in a tax year for tax relief purposes is the greater of:
A gross contribution of £3,600 or:
100% of your earnings, subject to the annual allowance.
The current annual allowance for most people is at £40,000.
Pensions and tax
Saving in a pension scheme can provide you with tax advantages.
Pensions have long been seen as a tax-efficient form of investment. The contributions that you pay into your pension will benefit from tax relief, and aren’t subject to tax while they’re invested in your pension pot (although the tax credit paid with dividends can’t be reclaimed by your pension scheme).
If you’re saving into a defined contribution pension scheme, when you decide to start drawing retirement benefits, you can take up to one quarter (25%) of your pension pot as a tax-free lump sum (called a pension commencement lump sum (PCLS)). You can then use the remainder of your pot to provide an income that may be subject to income tax at your marginal rate.
There are no restrictions on how much income you can withdraw from your defined contribution pension pot, but any income that you do withdraw may be subject to income tax at your marginal rate so there is a risk that taking the whole pension pot will push you into a higher-rate tax band for some or all of the amount taken.
You don’t pay National Insurance contributions on any PCLS you take, or on any pension income you receive.
If you’re a member of a defined benefit workplace pension scheme,the amount of PCLS that you can receive at retirement, and the pension that you receive during retirement, are based on a number of factors including how your benefits build up; the length of your pensionable salary and your final pensionable salary. Any pension paid to you will be liable to income tax at your marginal rate. You don’t pay National Insurance contributions on any PCLS you take, or on any pension income you receive.