Tax relief on investment growth
UK pension fund investments grow free of income tax and Capital Gains Tax (CGT).
Because pension funds have attractive tax benefits, your investment assets held within a pension fund can accumulate faster than if they were held directly. That’s because the returns on investments and deposits are usually taxed, although from 6 April 2016 tax-free allowances are being introduced for dividends and interest from investments and accounts held directly. From that date the first £5,000 of dividends will be tax-free, with any excess taxable at rates depending on whether you are liable to tax at the basic, higher or additional rate. For interest, the first £1,000 will be tax-free for basic-rate taxpayers and the first £500 for higher-rate taxpayers (with no allowance for additional-rate taxpayers). Over the long term, the tax benefits available to you in a pension fund can soon add up, creating a much larger pot.
Sometimes tax is deducted at source on income held within a pension fund. For example, interest or rent payments may be subject to tax. In this case, the tax can be reclaimed from HMRC by the pension provider and credited back into the pension fund.
There are other investments that can be held within the pension fund that attract no tax at source. These include offshore investments and gilts. These are not subject to tax declaration or payments.
In the distant past, pension funds were able to recover the 10% credit on UK dividend payments. However, it is no longer possible for the tax credit to be reclaimed; and, anyway, the dividend tax credit is being abolished from 6 April 2016.
- Tax rules can change and the value of tax relief will depend on your individual circumstances.
- SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.