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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Pensions and tax

This page and the pages that follow give you basic information on the state pension and UK personal  and occupational pensions. It is for general guidance only and does not constitute pensions advice, such as which type of scheme might be best for you, or whether or not you should pay into a particular pension. Such advice can only be given by a suitably qualified financial adviser. 

Content on this page:

Overview

Personal and occupational pensions are a way of helping you to save up towards your retirement.

If you are a relevant UK individual and are under the age of 75, you can usually get tax relief on contributions you pay into pensions. We explain more about how tax relief is given on our page Tax relief on pension contributions. The idea is to encourage people to provide for their own retirement rather than rely on the state pension.

As well as paying into your pension tax free, any growth on your pension savings within the fund is also generally free of tax.

To explain further: The money that you contribute into your pension pot will be invested by the pension company. Any returns that are made by the pension company are further invested, so that returns are earned on top of returns from that moment on. This is known as ‘compounding’ and it works as set out in the example below.

Example

Let’s assume that you have £100 to put into your pension on 1 January. Over the course of the year, it grows by 5%, so on 31 December your pension pot is worth £105. If the pension pot grows by 5% in the next year, you would have £110.25 (rather than just £110). Not only did you earn money on your original £100 in year two, you earned money on year one’s growth.

There are never any guarantees, but because compound interest is one of the most fundamental ways to build a pot of money, usually your pension pot will be expected to grow over time, even after allowing for inflation and pension scheme charges. There is no income tax or capital gains tax to pay each year on any growth within the pension pot.

Taking money out

You should bear in mind that once your money has been saved into a private pension there are rules on how much you can take out (depending on the type of pension you have) and when you can take it. You can read more about these rules on our page Pension withdrawals.

When pensions are paid out to you on retirement they are generally taxable, but you should be able to take part of the pension as a tax-free lump sum. You can read more about this on our pages Tax on pension income and What pension income is tax-free?.

Further information

Pensions are complicated. MoneyHelper provides free information and guidance on pension schemes. It is backed by the government.

The government offers a free service, called Pension Wise (as part of MoneyHelper) aimed at people thinking about taking money out of their pension. This provides basic information on your possible options.

HMRC have a general helpline for individuals, pensioners and employees, which you can phone if your question relates to income tax on your pension.

The website yourpension.gov.uk has information about the state pension. Our own guidance, including how it is accrued, taxed and on deferrals, can be found on our page The state pension.

For information about workplace auto-enrolment pensions, read our guidance, or go to GOV.UK. There is also information about workplace pensions on the website workplacepensions.gov.uk.

GOV.UK has more information on various types of pensions.

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