Pensions in the United Kingdom 

Pensions in the United Kingdom can be categorised into three major categories - state, employer’s workplace pension scheme and personal pensions.

The State Pension is funded by National Insurance contributions.  

The State Pension is a regular income paid by the UK Government to people who have reached State Pension age. 

The State Pension rules changed radically on 6 April 2016. Prior to that, the state pension was made up of two parts - the basic state pension and the additional state pension. The new State Pension combines those into a single amount, which is higher than the basic state pension. The full level of new state pension is £221.20 in 2024-25, although you could get more or less than this. 

You will be able to claim the new State Pension if you are:

• a man born on or after 6 April 1951

• a woman born on or after 6 April 1953

If you reached State Pension age before 6 April 2016, you would get the State Pension under the old rules instead.

The earliest you can get the new State Pension is when you reach State Pension age.

You will usually need at least 10 qualifying years on your National Insurance record to get any State Pension. They do not have to be 10 qualifying years in a row.

This means for 10 years at least one or more of the following applied to you:

• you were working and paid National Insurance contributions

• you were getting National Insurance credits for example if you were unemployed, ill or a parent or carer

• you were paying voluntary National Insurance contributions

The full level of new state pension is £221.20 per week in 2024-25, although you could get more or less than this. The amount received is usually based on National Insurance (NI) contributions you paid during your working life, so you may get more or less than this. To be paid the full amount, you must have paid or been credited with 35 full qualifying years of NI contributions or credits.

The Department for Work and Pensions (DWP) applies a formula, considering the number of full National Insurance years you have, contracted-out periods and the additional state pension you have accrued, to work out have much state pension you are due.

When you are working, you pay National Insurance and get a qualifying year if:

• you are employed and earning over £242 a week from one employer

• you are self-employed and paying National Insurance contributions

You might not pay National Insurance contributions because you are earning less than £242 a week. You may still get a qualifying year if you earn between £123 and £242 a week from one employer.

You may get National Insurance credits if you cannot work - for example because of illness or disability, or if you are a carer or you are unemployed.

For example, you can get National Insurance credits if you:

• claim Child Benefit for a child under 12 (or under 16 before 2010)

• get Jobseeker’s Allowance or Employment and Support Allowance

• get Carer’s Allowance

You can claim State Pension when you reach State Pension age. As of April 2021, this is 66 for men and women. From 6 May 2026, State Pension age will start increasing again and will reach 67 by 6 March 2028. The government has also stated an intention to phase in an increase to the State Pension age to 68 between 2037 and 2039.

You will not get your new State Pension automatically - you have to claim it. You should get a letter no later than 2 months before you reach State Pension age, telling you what to do.

If you have not received an invitation letter, but you are within 4 months of reaching your State Pension age you can still make a claim. The quickest way to get your State Pension is to apply online.

You can claim your new State Pension even if you carry on working. However, you have the option to defer which can increase the amount you get.

You can contact the Pension Service or the Citizens Advice Bureau if you have any questions about your State Pension.

Employer’s workplace pension scheme

A workplace pension scheme is a way of saving for your retirement through contributions deducted direct from your wages. Your employer may also make contributions to your pension through the scheme. If you are eligible for automatic enrolment, your employer has to make contributions into the scheme.

Your employer must enrol you into their workplace pension if you are an eligible employee -this is called automatic enrolment. 

You will be eligible if you are:

• not already in a workplace pension

• aged 22 or over

• under State Pension age

• earning more than £10,000 a year

• working in the UK

You can opt out of your workplace scheme, but it is a good idea to pay into it if you can afford to. This is because your employer has to make a contribution into the scheme as well as you. Also, you will get tax relief on the contributions you make into the scheme.

The minimum workplace pension contribution your employer pays is 3%, you pay 5%, therefore total minimum contribution is 8%.

These amounts could be higher for you or your employer because of your pension scheme rules. 

In some schemes, your employer has the option to pay in more than the legal minimum. In these schemes, you can pay in less, if your employer puts in enough to meet the total minimum contribution.

You should get information about any workplace scheme you are entitled to join within two months of starting work. If you do not, contact your personnel or human resources (HR) department.

Personal pensions 

Personal or stakeholder pensions are a way of making sure you have money on top of your State Pension. Pension funds are managed by professional money managers, who will invest your pension savings in a range of assets.

For most personal pensions, how much you get depends on:

• the amount you have paid in

• how well the pension fund’s investments have done

• your age - and sometimes your health - when you start taking your pension pot

You may want a personal or stakeholder pension:

• to save extra money for later in life

• to top up your workplace pension

• if you are self-employed and do not have a workplace pension

• if you are not working but can afford to pay into a pension scheme

Some employers offer stakeholder or private pensions as workplace pensions.

Stakeholder pensions must meet standards set by the government. 

You usually pay tax if savings in your pension pots go above:

• 100% of your earnings in a year - this is the limit on tax relief you get

• £60,000 a year (your annual allowance for 2024/2025 tax year)

• £1,073,100 - this is the lifetime allowance

Your annual allowance is the most you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax.

You will only pay tax if you go above the annual allowance. 

Your annual allowance applies to all of your private pensions, if you have more than one. This includes:

• the total amount paid in to a defined contribution scheme in a tax year by you or anyone else (for example, your employer)

• any increase in a defined benefit scheme in a tax year

You also pay tax on contributions if your pension provider:

• is not registered for tax relief with HM Revenue and Customs (HMRC)

• does not invest your pension pot according to HMRC’s rules

Once you have opened a plan you can begin making regular contributions and one-off payments. Your pension provider will claim tax relief from the government and add it to your pension plan.

When you retire, as long as you are at least 55 years old (57 from 2028) you have a few options for what to do with the money in your personal pension:

1. Take a lump sum out of your savings

The first 25% of your cash withdrawal is tax-free. If you want to take more cash, you must pay income tax on it, as you didn’t pay income tax when you put money into your pension plan. If you take all of your pension savings in one go, you might end up in a higher tax band, therefore paying more income tax.

2. Convert to a regular income

If you decide to receive a regular retirement income from your pension pot (annuity), you can ‘sell’ your pension pot to an insurance or pension company. They will then calculate how much income you will receive every year until you die. The advantage of this option is that you will receive a stable income. 

3. Take regular smaller cash amounts

If you want to be in control of your pension savings, you can decide to withdraw smaller amounts on demand. You can withdraw as much as you need, as often as you like and if you plan ahead, you can avoid going over the higher tax band, avoiding a higher tax rate on your cash withdrawal

4. Leave your money where it is 

If you are 55 and still employed, it might be an option to leave your money where it is. The longer your money is invested, the more likely it is that your pension pot will grow.

Services we offer

We are pleased to able to offer the following taxation based services: 

• A General tax consultation and/or specific tax advice;

• Tax planning for your general situation or for a specific transaction;

• Registration for National Insurance and Unique Tax Reference numbers;

• Preparation and submission of annual self-assessment returns;

• Preparation and submission of return for overseas landlords;

• Formation of UK and offshore companies in respect to an acquisition of the commercial property and administrative and accounting services for corporate entities. 

All taxation services are arranged on a fixed fee basis with the fee to be charged agreed in advance of any work being undertaken.

For all questions regarding your business in the UK and tax planning, please contact our Business Consultancy team at Law Firm Limited on +44 (0)20 7907 1460 or via email).