2.1 Pension Contributions Explained

Contributing to a pension is one of the most effective ways to build wealth for retirement. But how much can you pay in — and how does tax relief really work?

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Who Can Contribute to a Pension?

Almost anyone can contribute to a pension — whether you’re employed, self-employed, not working, or even contributing on behalf of someone else.

You can contribute if:

• You’re earning income through work (salary or self-employment)
• Or you’re UK resident and under 75 — even without earned income (limited to £3,600 gross per year)

You can even:

• Contribute to a pension for your spouse, partner, or children
• These still benefit from basic rate tax relief

How Much Can You Contribute?

You can usually contribute:

• Up to 100% of your UK relevant earnings, capped at the Annual Allowance
• Or £3,600 gross if you have no earnings (e.g. stay-at-home parent)

Contribution limits (2025/26):

How Tax Relief Works

When you contribute to a pension, the government tops up your payment using income tax you would otherwise have paid. This is known as pension tax relief.

Example (Basic Rate taxpayer):

• You pay £80 → Pension provider receives £100
• The government adds £20 (20% relief)

For higher earners:

• You claim additional 20% or 25% relief via self-assessment
• Total effective relief = 40% or 45%, reducing true cost significantly

Employer Contributions

Workplace pensions typically include employer contributions, which don’t reduce your personal Annual Allowance.

• Minimum auto-enrolment total: 8% of qualifying earnings
  
  
  • 5% employee (including tax relief)
  • 3% employer

Employers may offer matching above the minimum — e.g. they match your 5% with 5%.

Always check your employer’s scheme — not maximising contributions can mean leaving free money on the table.

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Carry Forward: Use Unused Allowances

If you haven’t used your full Annual Allowance in the last 3 tax years, you can carry it forward — provided:

• You were a member of a UK-registered pension in those years
• Your total earnings allow it

This is especially useful for:

• Business owners with lumpy income
• Those making large one-off contributions

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Tapered Annual Allowance: A Trap for High Earners

If your income exceeds £260,000 (adjusted income), your Annual Allowance reduces gradually down to £10,000.

This tapering is complex — advice is strongly recommended for those affected.‍

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Other Contribution Considerations

• Employer contributions don’t attract personal tax relief — but they’re not taxed as benefits
• Salary sacrifice can reduce your taxable income (NI savings too)
• Contributions to non-UK pensions may not attract UK tax relief

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Pensions for the Self-Employed

Self-employed individuals must arrange their own pension:

• Personal pension or SIPP
• They still receive tax relief as usual
• They must fund it entirely themselves (no employer)

Tip: Many platforms now offer low-cost pension options tailored to the self-employed.

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Checklist: Contributing Effectively

• Are you maximising employer matching?
• Have you checked if carry forward applies?
• Are you claiming higher rate relief via self-assessment?
• Have you considered a pension for a non-earning spouse/partner?
• If self-employed, have you set up regular contributions?

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Next Chapter Preview:

We’ll explore how tax relief on pensions actually affects your real return — and how to make the most of it through smart timing and structure.