We’re often asked how much an individual can pay into their pension, with their earnings being described as ‘pay’, ‘wages’ or more typically just ‘income’.  Can all of these be used to allow someone to pay a pension contribution and claim tax relief? The short answer is no – in order to contribute to a UK pension, they’ll usually need to have ‘relevant UK earnings’.  But what does this term actually mean? And can an individual contribute to a pension without any relevant UK earnings?

In this article we look at making personal contributions to a registered pension scheme.  We don’t cover employer contributions, or look at the annual, tapered or money purchase annual allowances.

Personal contributions and tax relief

HM Revenue & Customs (HMRC) rules on tax relief say that If an individual is both an active member (i.e. with benefits accruing) of a registered pension scheme, and a relevant UK individual* in the tax year in which the contribution is paid, then tax relief on personal or third party contributions will be available on the greater of:

·         the ‘basic amount’ which is currently £3,600, or

·         the amount of the individual’s relevant UK earnings chargeable to income tax for the tax year

*HMRC’s definition of relevant UK individual can be found here:

What counts as relevant UK earnings

So what counts as relevant UK earnings?  HMRC suggests looking at the income payments an individual has received, and how these have been taxed, to work this out.

HMRC’s definition ‘Earnings that attract tax relief’ includes:

•  Income from employment, for example pay, wages, bonus, overtime or commission.  This includes, among others:

            o   the part of a redundancy payment over the £30,000 tax exempt threshold

            o   taxable benefits in kind

            o   profit related pay

            o   Statutory Sick Pay

            o   Statutory Maternity Pay

            o   Permanent Health Insurance (PHI) payments paid by an employer

            o   Government Securities

            o   units in a unit trust

            o   partnership shares in a share incentive plan

• Self-employed income
• Income from a UK and/or EEA furnished commercial holiday lettings business
• Patent income, where the individual is receiving royalties for an invention

Further information, including the legislation the different types of income are taxed under, can be found in the links under ‘Further information’.

If there’s any doubt about what counts as relevant UK earnings, the individual’s accountant should be able to help with this.

Common misconceptions

The following are some of the scenarios where individuals and their advisers often think they have relevant UK earnings, but these don’t count:

Low or no earnings

A UK individual can contribute up to £3,600 a year to a registered pension scheme without any earnings at all.  This allows those not currently working  - perhaps because of childcare or caring responsibilities – to contribute to a pension.  However, they must be a relevant UK individual for such contributions to qualify for tax relief and presently tax relief can only be given if the contribution is made to a scheme that operates the Relief at Source (RAS) system. 

Note also, that where a member’s relevant UK earnings chargeable to tax are less than £3,600, tax relief on the amount of any contribution over the level of their earnings up to the £3,600 limit can only be given if the contribution is paid to a pension scheme that operates the relief at source (RAS).

Moving overseas

Some people think that although they’ve moved overseas, because they still have income from certain sources in the UK, they still have relevant UK earnings and can continue to pay pension contributions.  However, this isn’t always the case.  In particular, remember that dividends from shares don’t count and income from property rental only counts if the property is being rented out as a furnished holiday let.  If an individual is in any doubt about whether their income counts as relevant UK earnings they should speak to their accountant.

If an individual continues to have relevant UK earnings chargeable to UK income tax after moving abroad, then personal contributions can continue to be made as before, assuming they were resident in the UK when they became a member of the registered pension scheme. Where the individual doesn’t have relevant UK earnings because they’ve moved abroad (for example, if they’re being paid and taxed overseas), they could still pay up to £3,600 into a pension for the next five tax years after the tax year in which they move abroad, and receive UK tax relief.  Many pension providers don’t accept personal contributions which aren’t eligible for tax relief (for members below age 75), so the maximum tax relievable contribution is also the maximum contribution those providers will accept.

Note that if there is a double taxation agreement in place with the country the individual has moved to, and their earnings are not taxed in the UK, then these earnings don’t count towards relevant UK earnings or attract tax relief in the UK.

It’s also worth noting that a UK employer can continue to contribute to its employee’s pension regardless of whether the employee still has relevant UK earnings.

If an individual is moving abroad they should tell their pension provider as soon as possible so that appropriate action can be taken depending on their circumstances.

Example - who can pay personal pension contributions

Remember that the member’s accountant should be able to help with any queries about what income counts as relevant UK earnings, and what doesn’t.

Further information