How you benefit from tax relief

Tax doesn’t always have to be daunting. In fact, when it comes to saving for retirement, you actually benefit from another side of tax – tax relief.

What is tax relief?

When you pay money towards your pension, the money you would normally pay in tax goes into your pension instead of to the government.

The amount of income tax you then pay each month is calculated after your pension contributions have been taken, meaning you only pay income tax on your remaining pay.

The amount of tax relief you get is based on the highest amount of income tax you pay.

What does it mean for members?

More money goes into your pension pot instead of to the taxman.

If you’re a basic-rate taxpayer (20%) and contribute £100, the £20 you would usually pay in tax goes into your pension instead.

If you’re a higher-rate taxpayer (40%) and contribute £100, the £40 you would usually pay in tax goes into your pension instead.

Whilst your pension income at retirement will be subject to tax, the tax you’ll pay then is likely to be less than the tax you pay now. This means that pensions can be a more tax efficient way to save for the future than, for example an ISA, where you pay income tax now and receive tax relief when you take money out.

Any savings you have in the USS Investment Builder also benefit from immediate tax relief on any investment returns. Investment returns are added to your savings without incurring a tax charge.

Your tax-free options

When you retire, as well as getting your pension as a regular income, you also have the option to take a tax-free cash lump sum.

The standard tax-free lump sum from the USS Retirement Income Builder is three times your annual pension, but how much you take is up to you.

You can take more or less cash, or no cash at all, and receive a higher or lower pension instead. Some may want to take as much tax-free cash as possible to, for example, pay off their mortgage or go on a once in a lifetime trip. Others may prefer less upfront cash and a higher guaranteed income to treat themselves little and often.

The maximum amount of tax-free cash you can take is 25% of the 'value' of your benefits*.

Example: Jane has built up a pension in the USS Retirement Income Builder of £15,000 each year at retirement. If she opts for the standard lump sum she’ll also get £45,000 tax free, which is three times her annual pension.

The limits to tax relief

You can put as much as you want into your pension, but there are limits to how much tax relief you get.

Most people can put £40,000 into their pension savings each year and receive tax relief, which is called the annual allowance (AA). Any contributions above this allowance will be subject to tax.

There’s also a limit to how much pension you can take without triggering an extra tax charge. This is called the lifetime allowance (LTA), which is £1,030,000 for 2018/19.

You can only receive tax relief on pension contributions of up to 100% of your earnings each year.

The majority of USS members are unlikely to be affected by the LTA and AA limits, but we let you know how much of these you’ve used in your Annual Member Statement. Remember to consider what you’re paying into other pension schemes too.

If you’re a high earner or have taken cash payments from your USS Investment Builder pot, or any other defined contribution savings, your AA limit will reduce. Take a look at our annual allowance factsheet if this might affect you.

Use our checklist if you think you might be affected by the AA or LTA, or our annual allowance modeller for an estimate of the AA you’ve used up in the current year.

*If the value of your benefits exceeds the standard lifetime allowance, the maximum amount of tax-free cash you can take is 25% of the standard lifetime allowance.

For a glossary of our terms please see more information on our important terms page.

Published date: 16 January 2019

Key tax dates throughout the year:

31 January Deadline for self-assessment tax returns 3 March Deadline for Voluntary Salary Cap elections 5 April End of tax year 15 December Deadline for Scheme Pays elections