Pension tax relief in a nutshell

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Make your contributions work harder

When it comes to tax, many people think of charges and deductions, but there is another side to tax when saving for retirement. Pension schemes registered with HMRC qualify for tax relief, a valuable benefit that applies to the pension contributions you make to USS.

For most people, everything you contribute currently receives tax relief at the highest rate of income tax you pay. There are some limits which may apply, which are explained here. In effect, your pension contributions to USS cost you much less than they would from net pay. For example, a higher rate tax payer contributing £100 to their pension would otherwise receive just £60 in net pay, after income tax is taken.

USS member contributions immediately receive full tax relief
  Basic Rate Tax Payer Higher Rate Tax Payer Top Rate Tax Payer
Your pension contribution £100 £100 £100
How much income tax you would otherwise pay £20 £40 £45

Advantages of tax relief today

Your USS annual member statement shows exactly how much you have built up so far for retirement in the USS Retirement Income Builder and the USS Investment Builder (if any) – including your retirement income and tax-free lump sum. The pension you receive will be subject to tax when it comes into payment, but, as your income tax rate may be lower in retirement, there may be a benefit to receiving the tax relief upfront. For example, a higher rate tax payer benefits from tax relief of 40% today, but could pay just 20% income tax in retirement. Our introduction to pension tax explains this in more detail.

This is a potential advantage of saving with a pension over other retirement savings, where the income tax applies now rather than at retirement (such as an ISA). You also get employer contributions with USS.

How does the Lifetime ISA compare to USS?

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

You can keep track of our investment returns using our fund factsheets, available in My USS. You can also view a comparable performance of the funds. Log in or register with My USS here.

View our animated guides to find out how the USS Retirement Income Builder and USS Investment Builder work.

Tax benefits in retirement

When you retire you can take a tax-free cash lump sum payment; this can be up to 25% of the combined value of your savings in the USS Investment Builder (if any) and benefits in the USS Retirement Income Builder. The value of the standard tax-free lump sum you have built-up so far (shown in your USS annual member statement), increases each year you are a member. These lump sum payments are a valuable benefit for USS members. Find out more here.

The limitations of tax relief

HMRC set limits on the tax relief you can receive in any given year, known as the annual allowance (AA), and over your lifetime of saving known as the lifetime allowance (LTA). This limit is explained in our article, The easy way to keep track of your annual and lifetime allowances. Your USS annual member statement includes the AA and the LTA for your USS Retirement Income Builder benefits and your USS Investment Builder savings (if any).

You can use our AA modeller to help you estimate how much of your AA you are likely to use this tax year and next.

Member contributions table

Find out more about how the AA and LTA affects your pension savings in our factsheets.

If you have any unused pension tax relief, you have the potential to save more, tax efficiently. To find out more about the limits HMRC set on pension tax relief, such as the AA and LTA, take a look at our further reading options below.

  • An introduction to pensions tax – our overview of pensions tax can help you better understand your benefits and limitations.
  • The annual allowance modeller – use our modeller to get an estimate of the AA used up by your USS benefits over the 2017/18 and 2018/19 tax years
  • Factsheets and member guides – take a look at our tax factsheets to learn about pensions tax in more depth.
  • Infographic – our pensions tax infographic provides a handy overview of the topics covered in this article.

Important note: This publication is for general guidance only. It is not a legal document and does not explain all situations or eventualities. USS is governed by a trust deed and rules and if there is any difference between this publication and the trust deed and rules the latter shall prevail. Members are advised to check with their employer contact for the latest information regarding the scheme, and any changes that may have occurred to its rules and benefits. Any references to the trustee or USSL in this document means Universities Superannuation Scheme Limited, the trustee company of Universities Superannuation Scheme and any references to the scheme or USS means Universities Superannuation Scheme. As you review this information, please keep in mind that past performance is not necessarily a guide to future performance. The value of investments may go down as well as up and the return on your investments is not guaranteed.