Pension Tax Relief: How It Works

Understanding pension tax relief is one of the most effective ways to increase your retirement savings. Whether you contribute to a workplace scheme, a personal pension or a private pension, tax relief helps your money grow.

Below, we explain how pension tax relief works, how much you can receive, the rules for different types of pensions, and how contributions interact with your taxable income.

What Is Pension Tax Relief?

Pension tax relief is a Government incentive designed to encourage people to save for retirement. When you pay into a pension, the Government refunds the income tax you originally paid on that portion of your earnings and adds it directly into your pension pot.

You contribute from your income
The Government adds the tax you paid back into your pension
Your savings grow more efficiently as a result

This applies to most pension types, including workplace pensions, personal pensions and private pension tax relief arrangements.

A helpful way to think about it is that HMRC “tops up” your contribution to reflect what you would have earned before tax. That makes pensions one of the most tax-efficient saving methods available.

How Much Tax Relief Can You Get

The amount of tax relief on pension contributions depends on the income tax band you fall into. The higher the tax rate, the more tax relief you can claim.

Tax Relief Rates by Tax Band:

Taxpayer Type	You Pay Into a Pension	HMRC Adds	Total Relief	How You Receive It
Basic-rate (20%)	£80	£20	20%	Automatically added by the provider
Higher-rate (40%)	£80	£20 + £20	40%	20% added automatically + 20% reclaimed through self-assessment
Additional-rate (45%)	£80	£20 + £25	45%	20% added automatically + 25% reclaimed through self-assessment

How much can I pay into a pension and get tax relief?

You can normally receive tax relief on pension contributions of less than £60,000 per tax year or 100% of your annual earnings. This limit is known as the Annual Allowance. If your total contributions exceed this amount, the excess may be subject to an Annual Allowance charge.

Special rules

There are a few situations where the standard allowance does not apply. High earners may see their annual limit reduced under the Tapered Annual Allowance, while anyone who has already withdrawn taxable pension income could be restricted to the £10,000 Money Purchase Annual Allowance (MPAA). Even so, non-earners are still able to receive tax relief on contributions of up to £3,600 gross each year.

Carry Forward

If you haven’t used your full Annual Allowance in the past three tax years, you may be able to carry forward the unused amount and make a larger pension contribution while still receiving pension tax relief. This is useful for people whose income varies, or for those wanting to make a one-off top-up.

To use carry forward, you must have been a member of a UK-registered pension scheme in each year you’re carrying forward from, and you need sufficient earnings in the current tax year to support the full contribution. Tax relief is applied based on your current tax band.

Carry forward can significantly increase tax-efficient savings, but the rules can be technical, so checking eligibility before contributing is important.

Pension Tax Relief for Private and Personal Pensions

Most people receive pension tax relief through one of two systems, ‘relief at source’ or ‘net pay’.

Relief at Source

With relief-at-source, your pension contributions are made from your take-home pay, and your provider claims tax relief on your behalf. This is the approach used by most personal and private pensions, including SIPPs, and is the system many self-employed savers will encounter.

• You contribute from take-home pay
• Your provider automatically adds 20% basic-rate tax relief
• Higher and additional rate taxpayers claim extra through self-assessment

Net Pay

Under net pay arrangements, which are commonly used in workplace pension schemes, contributions are taken from your salary before income tax is calculated. This means you receive your tax relief immediately and in full, without needing to make any further claims.

Your pension contribution is taken from your gross salary
You pay less income tax upfront
All tax relief is applied automatically
You do not need to reclaim anything later

Salary Sacrifice

Salary sacrifice enables you to exchange part of your salary for an employer pension contribution. Because this happens before tax and National Insurance (NI) are calculated, you immediately pay less NI and may pay less income tax too, meaning your pension contribution goes further. Your employer also saves NI and may add some of these savings to your pension, increasing the overall amount paid in.

Which system gives more relief?

Higher-rate taxpayers receive the same total relief under both systems, but the difference is the method of receiving it.

If you hold a private pension such as a SIPP or traditional personal pension, you will almost always receive relief at source.

Do Pension Contributions Reduce Your Taxable Income?

Yes, depending on the system used. In a net pay arrangement (common in workplace pensions), pension contributions directly reduce your taxable income.
This means you pay less income tax straight away.

In a relief-at-source arrangement, your contributions are made from take-home pay and therefore do not reduce your taxable income directly. Instead, the Government adds basic-rate tax relief to your pension, increasing the value of your contributions straight away.

Higher-rate and additional-rate taxpayers can then claim any further tax relief they are entitled to through self-assessment. As a result, whether your taxable income is reduced depends entirely on the type of pension arrangement you have in place.

Are Pension Contributions Taxable?

Pension contributions are not taxable; in fact, they actually receive tax relief, which helps your savings grow more quickly. Where tax begins to apply is when you start withdrawing money from your pension.

When you take money out

Tax-free portion:
You can usually take 25% of your pension tax-free, either as a single lump sum or spread across smaller withdrawals.

Taxable portion:
The remaining 75% is treated as income and taxed at your marginal rate for that year.

Example: How pension withdrawals are taxed in practice

Imagine you have a £200,000 pension pot and decide to take £20,000 in one year. The first £5,000 (25%) is tax-free. The remaining £15,000 is added to your income for that tax year and taxed at your marginal rate. If your total income pushes you into a higher bracket, those portions may be taxed at a higher rate. Your original contributions, however, were not taxed and received tax relief.

How pension tax relief increases your contributions

Your Personal Contribution	Basic-Rate Relief Added Automatically	Additional Relief (Self-Assessment)	Total Added to Your Pension
£80 (basic-rate taxpayer)	£20	—	£100
£80 (higher-rate taxpayer)	£20	£20	£120
£80 (additional-rate taxpayer)	£20	£25	£125

Your £80 contribution increases to between £100 and £125, depending on your tax band, a significant increase that helps long-term pension savings grow more efficiently.

How My Pension Expert Can Help You Maximise Your Tax Relief

Pension tax relief can be one of the most effective ways to grow your retirement savings, but the rules can feel complex, especially if you have multiple pensions, earn variable income, or fall into a higher tax bracket. Many people unintentionally miss out on the relief they’re entitled to, apply contributions inefficiently, or become affected by allowances they didn’t know existed.

My Pension Expert helps individuals understand how pension tax relief applies to their circumstances and how to structure contributions in a tax-efficient way. This includes guidance on:

Assessing whether you’re receiving the correct level of tax relief
Understanding the Annual Allowance and avoiding unexpected charges
Deciding whether a private pension or personal pension could offer additional tax-efficient saving opportunities
Reviewing existing pension arrangements to ensure contributions are structured effectively
Exploring whether consolidating pension pots could simplify tax management or improve efficiency

Our goal is not to increase contributions for the sake of it, but to help you understand how tax rules interact with your pension strategy. By clarifying the options available and the potential implications of each, we support you in making decisions that satisfy your long-term financial goals.

Frequently Asked Questions

How does pension tax relief work in the UK?

The Government returns the income tax you’ve paid on the portion of earnings you contribute to a pension. Basic-rate relief is added automatically, while higher and additional rate taxpayers claim extra through self-assessment. This increases your contributions and helps your pension grow faster.

How much can I pay into a pension and still get tax relief?

You can receive tax relief on earnings less than £60,000 or 100% of your earnings each tax year. This limit may be lower if you are a very high earner (due to tapering) or if you have accessed taxable pension income (generating the MPAA).

Do pension contributions reduce my taxable income?

In net pay workplace schemes, contributions do reduce your taxable income.
However, in relief-at-source schemes, they don’t. Instead, you receive top-ups from the Government.

Do self-employed people get tax relief on pension contributions?

Yes. The self-employed receive tax relief in the same way as others contributing to a personal pension or private pension scheme. 20% is added automatically, and higher/additional rate relief is claimed through self-assessment.

How do higher-rate taxpayers claim additional pension tax relief?

You claim the extra tax relief through your self-assessment tax return.
Your pension provider adds the first 20% automatically, and you can reclaim the remaining amount directly from HMRC.