By contributing to a pension scheme, you can benefit from tax incentives that enhance your overall returns, making it easier to build savings that’ll support you in your later years.
What is pension tax relief?
Pension contributions tax relief is a government incentive to encourage retirement savings. When you contribute to a pension scheme, basic rate of income tax you’d normally pay on those contributions is added to your pension pot, essentially increasing it with ‘free’ money.
The tax relief you receive depends on your income tax band. Basic rate taxpayers get 20% relief added to their pension. Higher and additional rate taxpayers can claim further relief (40% and 45%) through a tax code adjustment or HMRC refund. For details on how higher and additional rate tax relief is claimed, please see the section below on this page.
It’s worth noting that income tax bands vary slightly in Scotland, so it’s important to be aware of your specific situation when planning your pension contributions
How does pension tax relief work?
There are two ways you can claim pension tax relief on your workplace pension, and your employer will typically arrange these for you.
Relief at source
Relief at source means your employer takes your pension contributions from your salary after tax has already been paid. If you’re a member of The People’s Pension, we automatically claim back tax relief for you at the basic rate of 20%. Just ensure you provide us with your full details and we’ll handle the rest.
‘For example, Tim, a basic rate taxpayer, contributes £50 (including tax relief) to his pension each month
- Tim personally pays £40
- The government adds £10 (the 20% tax that would have been deducted)
- Tim’s employer contributes an additional £30
- The total pension contribution is £80 per month
Tim receives £40 extra from his employer and the government to boost his pension.
Net pay arrangement
Your employer deducts your contributions from your salary before tax has been paid. This means you only pay tax on the amount left, so you get your full tax relief right away.
For example, Tim, a basic rate taxpayer, contributes £50 to his pension each month:
- Tim pays £50 from his salary before tax
- This reduces his taxable income, so he pays less tax on his salary
- Tim’s employer still adds £30 to his pension
- The total pension contribution is £80 per month
Since tax relief is applied immediately on Tim’s income, there’s no need for the government to top up the contribution on a net pay arrangement. This also applies to higher and additional rate taxpayers, which means there’s no need to claim further relief using this method.
Tax relief when you don’t pay tax
Whether you get tax relief on pension contributions when earning below the taxable threshold depends on your employer’s method:
- Relief at source – Yes, the government adds 20% tax relief, even if you don’t pay tax.
- Net pay arrangement – No, contributions are taken before tax, so no tax relief if you don’t earn enough to pay tax.
If your employer uses the net pay arrangement
If your employer uses a net pay arrangement, you don’t receive tax relief if you earn below the taxable threshold.
However, from the 2025/26 tax year, the government will provide a top-up payment to eligible low earners, ensuring they receive similar benefits to those under the relief at source method.
If your employer uses the relief at source method
The government will give you tax relief at the basic tax rate of 20% as follows:
- If you earn £3,600 or less annually, or nothing at all, you can receive tax relief on pension contributions up to £3,600 each year. This includes a 20% government top-up, meaning you can contribute £2,880 yourself.
- If you earn over £3,600 a year, you can receive tax relief on pension contributions up to 100% of your earnings, capped at £60,000 annually. For example, if you earn £20,000, you can contribute up to £16,000 and receive an additional £4,000 in tax relief for a total of £20,000.
Tax relief when you’re a higher rate taxpayer
If you pay a higher rate of tax, how to claim tax relief on pension contributions depends on your employer’s method.
With relief at source, you get 20% tax relief automatically, but you have to claim the extra 20% yourself through Self-Assessment or by contacting HMRC.
With the net pay arrangement, you receive the full 40% tax relief automatically because your contributions are taken out before tax is calculated, so you don’t need to do anything else.
Checking your tax relief method
The best way to check your tax relief method is to contact your employer, who can clarify whether it’s applied to your gross pay (before tax) or net pay (after tax).
Pension tax relief limits
The current limit for UK pension tax relief is £60,000, and withdrawing money from your pension could potentially lower this limit. Your contributions may also be restricted if you’re affected by the tapered annual allowance.
Carrying over your pension tax relief annual limit
If you exceed your annual allowance, you may owe tax — but you can carry forward unused allowance from the past three tax years to reduce the charge.
To qualify, your current year’s contributions must exceed the annual allowance. You can then use any leftover tax relief from the last three years, starting with the oldest.
Conditions for ‘carry forward’:
- Your total contributions can’t exceed your earnings (unless your employer contributes).
- You must have been in a UK-registered pension scheme (excluding the state pension) in each relevant year.
- You must not have triggered the MPAA.
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