The provision can apply to stay-at-home parents, carers and people taking career breaks who may otherwise make few or no private pension contributions. A spouse, partner or another person can provide the money, while the tax relief is credited to the pension belonging to the person with no earnings.
How the £720 Pension Tax Relief Works
According to reports, HMRC rules allow someone with no earnings to pay up to £2,880 during a tax year into an eligible pension operating relief at source. The pension provider can then claim £720 in basic-rate tax relief from the Government, taking the total gross contribution to £3,600.
The person making the payment does not necessarily have to be the pension holder. The source reports that another individual can contribute on the member’s behalf, with the payment generally treated for tax purposes as though it had been made by the pension member.
Thomas Drury, a money-saving expert at The Investors Centre, said the arrangement can be easily missed because pension tax relief is commonly associated with people who are earning a salary and paying Income Tax.
“It sounds counterintuitive because we describe this as pension tax relief, so naturally people assume you must first be paying Income Tax to receive it,” he said. A person with no earnings can still make the qualifying £2,880 contribution and receive the £720 top-up.
For a household spreading the maximum contribution evenly through the year, that amounts to £240 a month provided by the household and £60 a month added through tax relief. Drury stressed that the £720 remains inside the non-working partner’s pension. It is not an additional tax refund paid to the working partner who supplied the money.
Couples are advised to check that the pension involved operates relief at source and accepts third-party contributions, because individual schemes can impose their own administrative requirements.
Why Several Years Outside Employment Can Make the Rule More Significant
According to the Birmingham Mail, one year without using the maximum relief could represent £720 of Government pension top-up. Five years would amount to as much as £3,600 in tax relief, while ten years would represent up to £7,200, before taking account of any investment growth.
Drury said families can sometimes concentrate pension saving on the partner who remains in employment while the person raising children, caring for relatives or managing the household builds little private pension wealth.
He also cautioned against putting money into a pension when a household needs accessible savings for bills or unexpected costs. Pension funds are intended for retirement and generally cannot be accessed in the same way as ordinary emergency savings.
Retirement planning, he said, should also take account of what each partner already holds and whether both are building State Pension entitlement.
The separate rules governing gifts can also matter to household financial planning. According to GOV.UK, money counts as a gift for Inheritance Tax purposes. Gifts between spouses or civil partners are exempt from Inheritance Tax where the recipients live permanently in the UK and the couple are legally married or in a civil partnership. The Government guidance also provides other allowances for gifts, including a £3,000 annual exemption and specific rules for regular payments made from income.
