Tax relief is available on contributions paid into a personal pension fund by most UK members of registered pension schemes below the age of 75. 

Looking at personal pension schemes (as opposed to workplace pension schemes), tax relief effectively ‘grosses up’ a contribution by the 20% basic rate of tax – so for example if you pay £80 into your pension, the scheme operator can claim an additional £20 from the Government, so the total value added to your pension fund is £100. 

Tax relief is available up to the higher of: £3,600 or 100% of the individual’s “relevant UK earnings”. 

The most common types of relevant UK earnings include:

• Employment earnings, including the taxable value of any benefits in kind 
• Self-employment income, including partnership profit shares
• Employer-paid Statutory Sick Pay and Statutory Maternity Pay

The maximum amount physically payable to a pension scheme by or on behalf of someone with no relevant earnings is £2,880 (80% of £3,600). Any payments above this amount will not qualify for tax relief, and can create administrative complexities for the pension holder and the scheme provider. 

The £3,600 gross limit dates back to Finance Act 2000. Adjusted for inflation since then, the relevant limit would now be almost £6,850 gross, enabling a physical payment of £5,480 to benefit from basic rate tax relief – £2,600 more than the amount than can currently benefit. 

This would allow taxpayers with little or no relevant earnings to benefit from more tax relief on pension contributions, encouraging them to provide for their retirement. For taxpayers with other sources of taxable income (property rental, investments etc) it would also go some way to improving equality with their employed- or self-employed counterparts, who can benefit from tax relief on much higher pension contributions.