Basic rate tax relief can either reduce your tax bill or increase your pension fund, in the UK the governement encourages you to plan ahead and save for your retirement by offering all UK residents basic rate tax relief.

Basic rate tax relief is currently at 20% (as of 2009) This means that the governement will make a 20% contribution to you that matches the rate of income tax on your payment into your pension scheme. So for example if you wish to contribute £1,000 into your sipp or pension scheme you pay £800 and the governement tops this up by a further £200;this is know as basic rate tax relief.

Additionally even if you have no taxable earnings you are still entitled to claim up to £3,600 basic tax relief in any tax year. So for example if you wish to make a contribution of £3,600 into your pension you only have to £2,880 into your pension scheme and the government tops up the rest.

If your earnings exceed £3600 during the tax year you are allowed to contribute 100% of your earnings into your pension, this has been capped at £245,000 for 2009/10. The government is still liable to contribute 20% basic rate tax relief to your pension scheme and if your earnings are over £130,000 you can also claim higher rate tax relief of 40%.

In the UK there are 3 different types of pension schemes; these are company, public service or a personal pension (such as a sipp). Basic rate tax relief applies to all three of these; however how this is obtained can differ. If you have a company or public service pension scheme then generally you’re employer will subtract your pension contribution from you pay before deducting tax. (this does not include national insurance contributions). Therefore because you only pay tax on your remaining pay, whether you pay basic or higher rate tax, you will receive tax relief straight away. However, some employers offer tax relief in the same way those making personal pension contributions would receive it. With a personal pension scheme you pay tax before any contribution is made and the pension scheme administrator then has to apply to HMRC for tax relief. Unlike a company or public service pension scheme it could take up to 11 weeks for this to be applied to your account.

If you are a dentist or a GP and contribute to a public service pension scheme you are taxed as self-employed and therefore should claim tax relief through you Self Assessment tax return.

Basic rate tax relief will also apply if you are contributing to someone else’s pension scheme such as a husband, wife, civil partner, child or grandchild. Even in a situation where there is no income you can still contribute £3,600 a year, tax relief will be added and the basic rate and you will only have to pay £2,800. Additionally, depending on the terms and conditions you can also pay into someone else’s company scheme, this person will then be able to claim tax relief on your contribution through their tax return or putting in a claim to HMRC.