Contributing to a family member’s pension

Did you know it is possible to contribute to someone else’s pension?

This is particularly useful if you have already maximised your pension contributions, your spouse isn’t working, or you want to give money to children or grandchildren.

The individual’s pension allowance would be 100 percent of their earnings (up to £40,000) or £3,600 if they have no earnings. As long as your contribution to their pension means their total contributions remain below the allowance, you can pay as much as you like into their pension. Not only would they benefit from the contribution, the pension holder can then claim tax relief at their tax rate. They would automatically receive a 20 percent rebate and if they are a higher rate tax payer then they can claim the remaining tax through a self-assessment tax return.

How would it work? 

Example 1- You have already contributed the maximum to your pension for the tax year and your partner no longer works. 

• Your partner would have a £3,600 allowance for pension contributions for each tax year as they are not earning

• You can pay £2,880 into their pension

• They automatically receive £720 (20%) in tax relief. Total contribution = £3,600

Example 2 – You and your partner decide you want to help your son with his retirement.

• You have surplus income and decide you have £6,000 you could give to your son (£3,000 each is allowed under the annual gift allowance)

• As long as this stays below 100 percent of income, the £6,000 can be added to his pension

• He would get £1,500 tax relief contribution (20 percent tax relief)

• If he is a 40 percent tax payer, he then completes a tax return to claim the additional tax relief

These are little-known rules which can be extremely beneficial for people in similar situations to the examples outlined above. If you think you could take advantages of these tax planning opportunities, please get in touch.