Tax and pensions

There are a few things about pension tax that everyone should know

Tax relief

To help save for your retirement, the government doesn’t make you pay tax on all or a lot of the earnings you put into your pension pot. This is called tax relief. So the tax you’d normally pay goes into your pension savings instead.

When paying in through your employer

When your employer sets up your workplace pension, they have to choose 1 of 2 methods for how you get your tax relief.

One method gross tax basis, (also known as Net Pay Arrangement) takes your pension contributions from your pay before your wages are taxed, which means you only pay tax on what’s left so you get your full tax relief straightaway, unless you don’t pay tax.

The other method net tax basis, (also known as Relief at Source) takes your pension contributions after they’re taxed from your salary. If you’re set up on this basis, then we automatically claim tax relief for you and add the basic tax rate of 20% to your pension contributions.

If you live in Scotland and you pay the Scottish starter rate of tax at 19%, we’ll still give you tax relief at 20% and you won’t have to repay the difference. If you live in Wales, your tax rates and allowances are currently the same as England and Northern Ireland.

If you pay the basic rate of 20% tax

If you’re a basic-rate taxpayer, you don’t need to do anything – you’ll always get tax relief on your workplace pension contributions automatically (regardless of which tax relief your employer uses).

If you pay higher rate tax

If you’re a higher rate taxpayer, it depends on how your employer set up your workplace pension – and which tax relief method they use.

If your pension contributions are taken after tax, you get the first 20% tax back automatically, then you can claim the rest from HM Revenue and Customs (HMRC) in your self-assessment return.

If you don’t pay tax

If you don’t pay tax because your earnings are below the annual income tax personal allowance, it depends on how your employer set up your workplace pension – and which tax relief method they use.

If your pension contributions are taken on the gross tax basis, you will not benefit from the tax relief that a taxpayer would receive, and you cannot claim any money back from HMRC. You still need to contribute at least the same minimum amount that taxpayers have to contribute into their pension pots.

If your pension contributions are taken on the net tax basis, the government will give you tax relief at the basic tax rate of 20% as follows:

  • If you earn £3,600 or less a year or you don’t earn anything at all – you can get tax relief on your pension contributions up to £3,600 every year. This includes the government top-up of 20%, so you can’t pay in more than the net amount of £2,880 each year.
  • If you earn more than £3,600 a year – you can get tax relief on your pension contributions up to 100% of your earnings every year (so up to however much you earn), so long as it doesn’t exceed the current annual allowance of £60,000. For example, if you earn £20,000, you can pay in up to £16,000 each year and get an additional £4,000 in tax relief (ie £20,000 gross contribution).

How do I check which tax relief method I’m on?

Ask your employer whether your pension contributions are taken before or after your earnings are taxed. Is it gross pay or net?

Your ‘gross pay’ is the amount you’re paid before tax is taken. So when we take pension contributions before tax, we call it ‘gross tax basis’ – because that would mean we’d be taking your contributions from your ‘gross pay’.

Your ‘net pay’ is the amount you’re paid after tax has been taken. That’s why we call it ‘net tax basis’ when we take pension contributions after tax – because that would mean we’d be taking your contributions from your ‘net pay’.

When paying in yourself 

If you make extra pension contributions by Direct Debit or by ad-hoc lump sum payments, we’ll automatically claim tax relief at the basic tax rate of 20% and add it to your pension savings.

Pension tax relief allowances

Pension annual allowance

When saving into a pension, there’s an annual allowance of how much you can save into your pension each year and get tax relief on.

The standard limit is currently £60,000 – across all of the pension schemes you belong to.

This allowance may be reduced when you take money out of your pension. Depending on how you take your pension savings, your money purchase annual allowance (MPAA) might be triggered. This may also restrict your ability to carry forward allowance.

Find out more about the MPAA

Carry forward pension annual allowance

If you go over your annual allowance limit, you’ll normally have to pay tax on the excess – but in some cases you can carry forward any unused annual allowance from the previous 3 tax years, which may reduce the tax charge.

To carry forward your allowance, contributions must exceed your annual allowance in the current tax year. You’re then permitted to use any unused tax relief from the preceding 3 tax years, starting with the tax year 3 years ago.

You’ll need to meet 3 conditions to use ‘carry forward’:

  1. You must earn at least the amount you wish to contribute in total in the current tax year (unless your employer is making the contribution). For example, if your earnings are £70,000 – you can only contribute up to £70,000 and get tax relief on this.
  2. You must have been a member of a UK-registered pension scheme (this does not include the state pension) in each of the tax years from which you wish to carry forward.
  3. You must not have triggered the MPAA.

Your contributions may also be restricted if you’re affected by the Tapered Annual Allowance.

For more information, visit The MoneyHelper website.

You can use the pension annual allowance calculator on the government’s website to see how much you can carry forward or check if you have an annual allowance tax charge.

Pension lifetime allowance

Between 2006 and 2024 there was a maximum amount an individual could save in their pensions in a tax efficient way, known as the ‘lifetime allowance’ or ‘LTA’. The LTA was abolished on 6 April 2024 when 3 new allowances came into effect:

Some people may have registered for lifetime allowance protection with HMRC in the past to keep entitlement to a higher amount.

Pension tax when taking money out

When you take money from a pension pot, 25% of it is usually tax free (up to a maximum of £268,275 unless you have protection for a higher amount).

The rest (usually 75%) is taxable like other earned income, such as a salary. But you don’t pay national insurance on it.

In a few cases, you might get more than 25% tax free if you’re eligible for protected tax-free cash – but it’s quite uncommon. If this is the case for you, we’ll let you know when you take money from your pension pot with us.

You can find out more about this on our help and support pages.

What tax rate applies?

Payments from the other 75% of your pension pot are classed as ‘earned income’ which means you’re taxed at the highest rate of tax you pay in the tax year the money is taken.

How is my pension tax calculated?

Your tax is calculated on a yearly basis, so it depends on how much income you’ve received in that tax year (the tax year runs from 6 April to 5 April). Where payable, we’re told to deduct tax from the payment and pay it direct to HMRC so you’ll receive the net amount.

It’s really important to consider whether adding the taxable pension payment(s) to your other income could push you into a higher tax band for that tax year (meaning that you could pay more tax than usual).

Find out more about income tax rates and personal allowances on the government’s website.

Watch out for emergency tax

Emergency tax applies when HMRC haven’t given us your tax code yet, so a temporary tax code is applied instead. You’ll sometimes see it called an ‘emergency month 1’ tax code because it’s treated like your first month of income for that tax year.

The reason you can end up paying lots of tax when you’ve got an emergency tax code is – it’s assumed that you’ll be paid the same amount every month for the rest of the year.

This can sometimes happen again in future tax years. So you may pay too much tax at times – but if you do, you’ll be able to claim a tax refund from HMRC.

Basic-rate tax

We’ll normally deduct basic-rate tax at 20%. So if you pay a different rate of tax, you’ll either be due a refund from HMRC or you may need to pay further tax.

Go to the government’s website to find out how to claim a tax refund from HMRC.

Tax relief when paying into a pension after you’ve taken money out

Money purchase annual allowance (MPAA) and other rules

Money purchase annual allowance (MPAA)

If you start to take money from your pension savings, the amount that can be contributed to your pension while still getting tax relief on might reduce. This is known as the Money Purchase Annual Allowance or MPAA. For most people, the total amount that can be contributed to their pensions each tax year which they’ll receive tax-relief on is £60,000. This includes any contributions from your employer. You’ll trigger the MPAA if you take cash from your flexi-access drawdown account or take a flexible lump sum, this will reduce the amount you can pay into a defined contribution scheme – like The People’s Pension – to £10,000 a year.

It’s important you think about your MPAA if you want to continue paying into a pension after you start taking money from your pension pot.

Other tax rules around continuing to save

There are other HMRC rules about continuing to pay into a pension pot after you’ve started taking money out of your pension savings – this is to stop you from taking your tax-free cash and then putting it straight back into another pension. If you pay your tax-free lump sum back into a registered pension scheme, there could be serious tax consequences and other charges to consider.

We’ll let you know if you withdraw savings from your pension pot in a way that triggers your MPAA. Then you’ll have 91 days to let any other providers you’ve got pensions with know.

We’ll warn you about these rules when they apply to you – but it’s also a good idea to get guidance on this from Pension Wise (a free government service).

You might want to get specific advice from a financial adviser – you can find an adviser who specialises in retirement planning on the MoneyHelper website.

More about your guidance and advice options.

Which options will trigger your MPAA?

Will the amount I can save into a pension and get tax relief on go down if I…

keep my pension pot where it is?NoLeaving your money in your pension pot won’t trigger your MPAA .
take a pension pot of £10,000 or less all in one go (as a small pot lump sum)?No Taking a pot of £10,000 or less all in one go as a small pot lump sum won’t trigger your MPAA.
take a pension pot of more than £10,000 all in one go?Yes Taking a pot of more than £10,000 all in one go will trigger your MPAA.
take it a bit at a time – taking my tax-free cash up front?YesBut not to begin with.
The 25% tax-free cash won’t trigger your MPAA. But it will be triggered once you start taking lump sums from your flexi-access drawdown account.
take my pension pot a bit at a time – spreading my tax-free cash across all withdrawals?Yes From the first lump sum.
As soon as you take the first lump sum from your pension pot, your MPAA will be triggered.
buy a guaranteed income (annuity)?MaybeIn most cases, buying a guaranteed income won’t affect the amount you can pay into a pension pot and get tax relief on.