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How does pension tax relief work?

UK investors under age 75 can benefit from up to 50% pension tax relief (by 5th April 2013).

The higher your rate of tax, the more tax relief you could receive. Even non-earners, including children and those with an income under £3,600 a year can benefit, but can only contribute £2,880 net this tax year. The tax man pays the rest!

Basic rate tax relief of 20% is added automatically. For instance , you contribute £8,000 to your pension and the government adds £2,000, to make a total investment of £10,000.

Higher rate taxpayers can claim back up to a further 20% through their tax return - another £2,000 in this example. So the cost of a £10,000 contribution is as little as £6,000.

Top-rate taxpayers can claim back up to a further 30% through their self-assessment return. - another £3,000 in this example. So the cost of a £10,000 contribution is as little as £5,000.

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