The short answer
- You get tax relief at your top rate: 20%, 40% or 45% (19% to 48% in Scotland).
- Salary sacrifice also saves 8% National Insurance for basic-rate taxpayers and 2% above that.
- Between £100,000 and £125,140, relief is effectively 60% because contributions restore your Personal Allowance.
- You can pay in up to £60,000 a year, or your earnings if lower, including your employer’s contributions.
How pension tax relief works
Money paid into a pension is treated as if it had never been taxed. If you pay Income Tax at 40%, £1,000 in your pension costs you only £600 of take-home pay. The relief applies to personal contributions up to 100% of your earnings, within the annual allowance.
When you take money out later, 25% is usually tax-free and the rest is taxed as income. Many people pay a lower rate in retirement than while working, which adds to the benefit.
Three ways relief is given
- How
- You pay 80%; the provider claims 20% from HMRC
- Higher rates
- Claim the rest through Self Assessment
- Used by
- SIPPs, personal pensions, many workplace schemes
- How
- Taken from pay before Income Tax
- Higher rates
- Automatic
- Used by
- Many occupational schemes
- How
- Your salary is cut; your employer pays in instead
- Extra
- Saves National Insurance for you and your employer
- Used by
- Employers who offer it
What a contribution really costs
| Salary | Relief at source or net pay | Salary sacrifice |
|---|---|---|
| £30,000 | £800 | £720 |
| £50,000 | £800 | £720 |
| £60,000 | £600 | £580 |
| £110,000 | £400 | £380 |
| £150,000 | £550 | £530 |
Claiming higher-rate relief
- You pay in£4,800
- Provider adds basic-rate relief£1,200
- You claim through Self Assessment£1,200
Thousands go unclaimed
Relief at source only adds 20%. Higher and additional-rate taxpayers must claim the rest, usually through a tax return or by asking HMRC to adjust their tax code. You can claim for the last four tax years.
Salary sacrifice
With salary sacrifice, you agree to a lower salary and your employer pays the difference into your pension. You save Income Tax and employee National Insurance, and your employer saves 15% employer National Insurance. Some employers add their saving to your pension.
- Income Tax saved£400
- Your NI saved£160
- Employer NI added to your pension£300
Salary sacrifice can affect things linked to salary, such as mortgage applications, life cover and Statutory Maternity Pay, and it cannot take pay below the National Minimum Wage.
The £100,000 trap: 60% relief
Between £100,000 and £125,140, you lose £1 of Personal Allowance for every £2 you earn, so the effective tax rate is 60%. Pension contributions reduce your adjusted net income and give the allowance back.
- Income Tax saved£6,000
- Personal Allowance restoredIn full
Paying in enough to bring income down to £100,000 can also restore tax-free childcare and the 30 hours of funded childcare, which stop at £100,000.
Pensions and Child Benefit
The High Income Child Benefit Charge is based on adjusted net income, which pension contributions reduce. A parent earning £65,000 with two children repays £584 of Child Benefit. Paying £5,000 gross into a pension removes the charge.
- Cost after tax relief£3,000
- Child Benefit charge removed−£584
Scottish taxpayers
Scottish taxpayers get relief at their Scottish rate. Relief at source schemes add 20% even for starter-rate taxpayers paying 19%. Those paying the intermediate, higher, advanced or top rates claim the extra through Self Assessment. A Scottish taxpayer earning £50,000 pays 42% at the margin, so £1,000 costs £580.
Non-earners and low earners
Anyone under 75 can pay up to £3,600 gross a year into a relief at source pension, even with no earnings. You pay £2,880 and the government adds £720. This works well for non-working spouses, carers and children. In a net pay scheme, people earning less than the Personal Allowance get no relief at source; HMRC can make a top-up payment to eligible low earners after the tax year ends.
The annual allowance
The annual allowance is £60,000, covering your contributions, your employer’s and tax relief. Your own contributions only get relief up to 100% of your earnings. Contributions above the allowance face a tax charge at your marginal rate, which claws back the relief.
The tapered allowance and MPAA
| Threshold income | Adjusted income | Annual allowance |
|---|---|---|
| £200,000 or less | Any | £60,000 |
| Over £200,000 | £280,000 | £50,000 |
| Over £200,000 | £300,000 | £40,000 |
| Over £200,000 | £360,000 or more | £10,000 |
Once you take taxable money flexibly from a defined contribution pension, the money purchase annual allowance cuts the limit on further contributions to £10,000 a year.
Carry forward
You can use unused annual allowance from the previous three tax years, as long as you were a member of a registered pension scheme in those years and use this year’s allowance first. Your own contributions still only get relief up to your earnings this year.
Taking money out
- Age 55Earliest access today
Rising to 57 from April 2028.
- Any time after25% tax-free
Up to £268,275 in total, the lump sum allowance.
- RestTaxed as income
Through drawdown, an annuity or lump sums.
Changes on the way
- From 6 April 2027, most unused pension funds will count towards your estate for Inheritance Tax.
- From April 2028, the normal minimum pension age rises from 55 to 57.
- From April 2029, salary sacrifice will only save National Insurance on the first £2,000 a year.
Employer matching
Many employers pay more into your pension if you do, for example matching your contributions up to 6% of salary. Taking the full match is usually the best return available anywhere: on a £40,000 salary, an extra 3% from you costs about £960 a year after basic-rate relief, and brings another £1,200 from your employer. Check your scheme’s matching rules before reducing contributions.
Self-employed pensions
Self-employed people have no employer contributions and usually pay into a personal pension or SIPP using relief at source. Relief is based on your taxable profits, and higher-rate relief is claimed on your tax return. Contributions do not reduce your Class 4 National Insurance, but they can reduce payments on account for the next year. Company directors can have their company pay in instead, which saves Corporation Tax and National Insurance.
Defined benefit schemes
In defined benefit schemes, such as many public sector pensions, contributions are usually taken from pay under net pay, so relief is automatic. For the annual allowance, the growth in your promised pension is valued at 16 times the increase in your yearly pension, plus any increase in a separate lump sum. A big pay rise or promotion can create an unexpected annual allowance charge, so check your annual pension savings statement.
Pensions for partners and children
You can pay into a pension for a spouse, partner or child. Up to £2,880 a year net, or £3,600 gross, gets basic-rate relief even if they have no earnings. For a child, the money is locked away until at least 57, so it suits long-term gifts, for example from grandparents. Regular contributions from surplus income can also be exempt from Inheritance Tax.
Sacrificing a bonus
Some employers let you sacrifice a bonus into your pension before it is paid. You avoid Income Tax and employee National Insurance on the bonus, and your employer may add its National Insurance saving. For someone whose bonus would take them over £100,000, sacrificing it can save 62% or more of its value in tax and NI. The decision must be made before the bonus is awarded.
Year-end planning
- Check your income against £50,270, £60,000 (Child Benefit), £100,000 and £125,140.
- Work out how much you would need to contribute to fall below the next threshold.
- Check your remaining annual allowance and any carry forward from the last three years.
- Make relief at source contributions before 5 April so they count for this tax year.
- Claim higher-rate relief on your tax return.
Common mistakes
- Not claiming higher-rate relief on relief at source contributions.
- Opting out of a workplace pension and losing the employer’s contribution.
- Triggering the money purchase annual allowance by taking a small taxable withdrawal.
- Going over the annual allowance after a large employer contribution or a final salary increase.
- Forgetting that personal contributions cannot exceed your earnings.
Tax relief going in, tax coming out
Pension relief is not a gift: most of the money will be taxed when you take it out. The benefit comes from three things. First, 25% of the pot is normally tax-free. Second, many people pay a lower rate in retirement than while working, getting 40% relief going in and paying 20% coming out. Third, investments grow free of tax inside the pension. A basic-rate taxpayer who also pays basic rate in retirement still gains, because of the tax-free quarter.
Auto-enrolment minimums
Employers must automatically enrol most workers aged 22 to State Pension age who earn over £10,000 a year. The minimum total contribution is 8% of qualifying earnings between £6,240 and £50,270, with at least 3% from the employer. The workplace pension calculator shows what that adds up to.