How tax relief boosts your pension contributions

You’ll often pay Income Tax on money you receive. But if you put that money into a pension, the tax you’d normally pay is usually added to your pension instead. 

This is called tax relief and means your savings are usually boosted by 20% or more, depending on your rate of Income Tax. It’s one of the best things about saving into a pension.

In many cases, you won’t need to do anything as your employer or pension provider will apply tax relief automatically for you. 

But you’ll usually need to claim tax relief yourself if you’re paying into an old retirement annuity contract. Our guide about retirement annuity contracts explains what to do. 

You might also have to take action if you:

• don't earn enough to pay Income Tax or 
• pay Income Tax at a higher rate than 20%.

You can see the Income Tax bandsOpens in a new window and Scottish Income Tax bandsOpens in a new window on GOV.UK. 

Here’s what to check.

There are two ways tax relief on your pension contributions can be claimed:

• Relief at source – your pension provider claims 20% tax relief from the government.

• Net pay – your pension contributions are made before you're taxed, so you pay Income Tax on a lower income.     

If you have a workplace pension, ask your employer which method they use or check paperwork for your scheme. If you set up your own pension, relief at source will be used.  

Your next steps depend on how your tax relief is applied. 

Relief at source essentially means your pension provider claims back the Income Tax you’ve already paid on the money, but at a fixed rate of 20% for everyone.

If you pay Income Tax at a higher rate than 20%, you’ll need to claim the extra tax relief yourself by:

•  contacting HMRCOpens in a new window or
•  completing a Self Assessment tax return.

Example: If you pay Income Tax at 40%, you can claim an extra 20% in tax relief. This means a £100 contribution into your pension will cost you £60, as your pension provider has claimed £20 in tax relief and you’ve claimed another £20 back. 

You’ll need to claim every tax year you’re eligible and can usually backdate a claim for the last three tax years. You’ll either receive the extra tax relief as a:

• refund at the end of the tax year
• change to your tax code so less tax is taken off your future income 
• reduction in your tax bill, if you owe HMRC tax.  

If you’re a non-taxpayer or pay the 19% Scottish starter rate, you’re entitled to keep the 20% tax relief as long as you don’t contribute more than you earn.

If you earn less than £3,600 a year, you can get tax relief on pension contributions you make up to £2,880 each tax year.

Net pay is where: 

• your employer makes your pension contribution before tax is calculated
• you pay Income Tax on your wages, minus your pension contribution.

This means you get the correct amount of tax relief, without needing to claim any additional amounts from HMRC. 

But if you don’t earn enough to pay tax, there’s no tax bill to reduce – so you don’t benefit from tax relief on your pension contributions. 

To fix this, from April 2025, non-taxpayers should receive a top-up payment to cover the tax relief that should have been given for the 2024/25 tax year.

This will be paid directly to you, not into your pension, so will be added to your income for tax purposes. 

Each tax year until you're 75, you can usually get tax relief on all your pension contributions up to:

• the amount you earn (see what counts as ‘relevant UK earnings’Opens in a new window on GOV.UK) and 

• your annual allowance – this is £60,000 for most and covers all payments into your pension, including any from your employer.

If you earn under £3,600, you can get tax relief on up to £2,880 of your pension contributions. 

Pension contributions made after age 75 are not eligible for tax relief.

The annual allowance includes all payments into your pension each tax year – yours, your employer’s and any one-off payments.

Example: If you earn £25,000 a year, you can usually pay up to £25,000 into your pension without paying tax (£20,000 of your money and £5,000 in tax relief). If you did this, your employer could contribute another £35,000 tax-free.

If you have a defined benefit pension (often called a final salary or career average scheme), the annual allowance counts how much your pension has increased, rather than the contributions paid in.

The standard annual allowance is £60,000 for the 2024/25 tax year, but it might be:

• between £60,000 and £10,000 if you earn over £200,000, called the tapered annual allowance
• £10,000 if you’ve taken money from a defined contribution pension, called the money purchase annual allowance.

You or your employer might also be able to contribute more than your annual allowance and still get tax relief. This is because you can sometimes use unused allowances from the three previous tax years. 

See our guide Carry forward: increase your annual allowance for pension savings for more information.

If your pensions savings are higher than your annual allowance, you’ll usually need to pay an annual allowance tax charge. This essentially means you’ll have to repay the tax relief that has been given.

See our full guide about the annual allowance for tax relief on pension savings for more information.

If someone else wants to pay into your pension, or you want to pay into theirs, you’ll need to ask the employer and/or pension provider if they allow it first.

If it’s an option, all contributions into your pension (other than from your employer) are seen as being made by you for tax relief purposes – even if they’re paid in by someone else.

This means the amount of tax relief you’ll get depends on your relevant UK earnings, not the person paying in the money. 

If you pay into your pension using salary sacrifice, your contribution is treated as being made by your employer. 

This means you don’t get tax relief in the standard way. Instead, as you’ve given up a portion of your wages, you’ll pay less Income Tax and National Insurance by having a lower salary – often making your take home pay higher.

Your employer will usually pay less National Insurance contributions too, so might add some or all of this saving to your pension contribution. 

For more information, see our guide about using salary sacrifice to pay into your pension. 

If you run your own limited company, you can usually decide which payments into your pension are made as: 

• employee contributions from your salary 
• employer contributions from your company. 

For employee contributions to qualify for tax relief, you need to make sure: 

• the amount you pay in is less than, or equal to, your earnings during the tax year (dividends do not count as earnings) and 
• the total amount paid into your pension is less than your annual allowance, including any made as employer contributions.

Employer contributions do not qualify for tax relief, but they can usually be deducted as a business expense to reduce the amount of corporation tax you need to pay.  

This is allowed as long as the employer pension contributions are ‘wholly and exclusively’ for business purposes, which typically means they’re a reasonable amount for the work being done.

For example, consistent amounts are used for any staff doing similar jobs and pension contributions are not higher than annual profits. 

For more information on the wholly and exclusively test, see HMRC’s Business Income ManualOpens in a new window

It’s a good idea to speak to a financial adviser, as they can explain the rules and work out what is best for your situation.

For example, if you make a large employer pension contribution, your profits and amount of dividend you can take will be reduced.