Pension tax relief explained: how much the taxman adds
The short answer: pension tax relief gives you back the Income Tax on what you pay into a pension. As a basic-rate taxpayer, £100 into your pension costs you £80; at 40% it costs £60. How you get it depends on your scheme: net pay takes your contribution before tax, so it is automatic; relief at source adds 20% for you, and higher-rate taxpayers have to claim the rest.
What £100 in your pension costs you
| Your tax rate | Cost to you | Added automatically (relief at source) | Extra you claim yourself |
|---|---|---|---|
| Basic rate (20%) | £80 | £20 | Nothing |
| Higher rate (40%) | £60 | £20 | £20 |
| Additional rate (45%) | £55 | £20 | £25 |
In Scotland the rates differ: intermediate-rate taxpayers (21%) claim an extra 1%, higher-rate (42%) 22%, advanced-rate (45%) 25% and top-rate (48%) 28%. See Scottish income tax vs England.
Method 1: net pay
Most workplace pensions with an employer-run scheme use net pay. Your contribution is taken from your gross pay before Income Tax is worked out. You pay tax on less, so you get relief at your highest rate straight away, with nothing to claim.
On a £40,000 salary paying 5% (£2,000 a year), your taxable pay becomes £38,000. You save £400 of tax, so the £2,000 costs you £1,600 (before National Insurance, which net pay does not save).
The catch used to be people earning below the Personal Allowance: they paid no tax, so they got no relief. Since April 2024 HMRC tops up low earners in net pay schemes after the tax year ends, so they are no longer worse off.
Method 2: relief at source
Personal pensions, SIPPs and many workplace schemes (including most master trusts) use relief at source. Your contribution comes out of your take-home pay, after tax. Your provider then claims 20% from HMRC and adds it to your pension, usually within a few weeks.
- You pay in £80 from your bank account or payslip.
- The provider adds £20, so £100 is invested.
- If you pay 40% tax, you claim another £20 from HMRC. At 45%, £25.
The extra relief does not go into your pension. It comes back to you as a tax refund or a change to your tax code.
How to claim higher-rate relief
- Work out your gross contributions: what you paid, plus the 20% the provider added. £4,000 paid in becomes £5,000 gross.
- If you file Self Assessment, enter the gross figure in the pension section.
- If you don't, contact HMRC through your online account or by phone. They will usually adjust your tax code.
- You can backdate claims for four tax years.
The extra relief only applies to contributions that match income taxed at 40% or more. If only £3,000 of your income is above £50,270, you can claim the extra 20% on up to £3,000 of gross contributions. This is one of the most commonly missed reliefs; see tax reliefs people forget to claim.
Salary sacrifice: relief plus National Insurance
Salary sacrifice is a third route. You agree to a lower salary and your employer pays the difference into your pension. Because it is no longer salary, you save Income Tax and National Insurance, and your employer saves its National Insurance too. On a basic-rate salary, £100 into your pension costs about £72. The National Insurance saving will be capped at £2,000 of contributions a year from April 2029. See salary sacrifice explained.
Limits to know
- Annual allowance: £60,000 a year of contributions, including your employer's, or 100% of your earnings if less. Unused allowance can be carried forward three years.
- Earning under £3,600: you can still pay in £2,880 a year and get £720 added through relief at source.
- High earners: the allowance tapers down above £260,000 of adjusted income, to a minimum of £10,000.
- Already drawing a pension flexibly: the money purchase annual allowance cuts it to £10,000.
Where relief is worth most
Pension contributions also reduce your adjusted net income. Between £100,000 and £125,140, where you lose the Personal Allowance, each £100 into a pension can save £60 in tax, and contributions can also help you keep Child Benefit or tax-free childcare. See the 60% tax trap.
Tax relief is only half the reward. Your employer's contributions are the other half; see what employer pension matching is worth.
Related reading: defined benefit vs defined contribution pensions and whether to opt out of a workplace pension.
This is general information, not financial advice. Tax relief depends on your circumstances and scheme rules.
Common questions
How does pension tax relief work?
The government gives back the Income Tax you paid on money you put into a pension. For a basic-rate taxpayer, £100 into a pension costs £80; for a higher-rate taxpayer, £60.
What is the difference between relief at source and net pay?
With net pay, your contribution comes out of your pay before tax, so you get full relief straight away. With relief at source, it comes out after tax and the pension provider claims 20% back; higher-rate taxpayers claim the rest themselves.
How do I know which method my pension uses?
Look at your payslip. If your pension is taken before tax is worked out, so your taxable pay is lower than your gross pay, it is net pay. If your provider adds a top-up to your pension, it is relief at source. Your scheme can also tell you.
Do I need to claim higher-rate pension tax relief?
Only with relief at source. You can claim the extra 20% or 25% through a Self Assessment return, or by contacting HMRC if you do not file one. You can backdate claims for four years.
Do non-taxpayers get pension tax relief?
With relief at source, yes: 20% is added even if you earn below the Personal Allowance, on up to £2,880 a year (£3,600 with relief). With net pay, low earners used to miss out, but the government now tops them up after the tax year ends.
How much can I pay into a pension with tax relief?
Up to 100% of your earnings, or £3,600 a year if you earn less, within the £60,000 annual allowance. The allowance is lower for some high earners and people who have already drawn a pension.