A guide to workplace pension tax relief

One of the major benefits of saving into a pension scheme is the amount of ‘tax relief’ you can receive – helping to supercharge your savings.

But what exactly is tax relief and how does it work? We’ve prepared a short guide to answer these questions and show how this can help you build a bigger pension pot.

How tax relief works on pension contributions

When you put money into your workplace pension (known as pension contributions), your employer and the government normally tops this up with their own contributions – giving you a boost to your pension savings.

When you make contributions to a workplace pension, some of the money that would have gone to the government as tax on your earnings is instead added to your pension pot – this is called tax relief.

How much pension tax relief do I get?

The amount of tax relief you get depends on the amount of income tax you pay at the highest rate:

  • Basic rate taxpayers get 20% tax relief on pensions
  • Higher rate taxpayers get 40% tax relief on pensions
  • Additional rate taxpayers get 45% tax relief on pensions

In Scotland, the amount of tax relief differs slightly due to different bands for income tax.

You could also agree to salary sacrifice with your employer – which could offer more tax savings to help boost your pension pot.

How pension tax relief is claimed

There are 2 ways you can claim pension tax relief, which your employer will set up on your workplace pension scheme…

Net pay arrangement

This is when your employer takes your contributions from your gross salary before tax. Because you only pay tax on what’s left, you’ll get your full tax relief straight away. If you’re a non-taxpayer in a net pay arrangement, you don’t currently receive any tax relief. The government intends to change this from the 2024/25 tax year.

Relief at source

This is when your employer takes your contributions from your net salary after tax, or if you pay contributions directly into your pot. If you’re a member of The People’s Pension, we’ll automatically claim tax relief for you at the basic rate of 20% (you’ll need to give us a valid National insurance number for us to do this).

For example…

Tim is a basic rate taxpayer and his employer uses the relief at source method. Tim contributes £50 from his salary into his pension pot each month. Of that £50, he would only pay in £40 himself. The remaining £10 is paid in by the government – which is the 20% tax it would usually take from £50 going into Tim’s salary. Tim’s employer then contributes its own £30 to Tim’s pension to bring the total to £80.

This means Tim gets £40 extra ‘free’ money from his employer and the government each month to help grow his pension pot.

How to claim higher tax relief on pension contributions

If you’re a higher rate taxpayer and your pension contributions are taken after tax (relief at source), you’ll need to fill in a Self-Assessment tax return and send this to HMRC to claim your extra tax relief.

Tax relief on one-off pension contributions

One way of growing your pension savings is to make one-off contributions into your pot. And the good news is you can get tax relief on these contributions too.

If you’re a member of The People’s Pension and make a one-off contribution into your pension, we’ll claim tax relief at the basic rate of 20% on your behalf and put this straight into your pot.

Even better, the more money you pay into your pension with us, the more tax relief you’re likely to receive. And if you’ve saved over a certain amount, you’ll also benefit from the rebate on our annual management charge.

A reminder about your pension annual allowance

While there is no limit to the amount you can save into your pension each tax year, there is a limit to how much you can save and still get tax relief on.

The standard limit – or annual allowance – increased from £40,000 to £60,000 from 6 April 2023 following the Spring Budget 2023.

If your taxable earnings for the year are below the annual allowance, you’ll receive tax relief on 100% of your earnings (up to the annual allowance) or £3,600 gross (whichever is higher). If you have an adjusted income over £260,000, your annual allowance will be reduced – this is called a tapered annual allowance.

If you go over your annual allowance limit, you’ll have to pay a tax charge – also known as the annual allowance charge.

However, in some cases you can carry forward any unused annual allowance from the previous 3 tax years, which may reduce the tax charge.

If you’ve started taking your pension savings, either by taking cash from a flexi-access drawdown account or taking a flexible lump sum (HMRC calls this an uncrystallised funds pension lump sum), you won’t be able to pay more than £10,000 into a defined contribution (DC) scheme (like The People’s Pension) a year and still receive tax relief.

More about tax relief with The People’s Pension

Read more about how tax relief is applied to your pension pot with The People’s Pension.