2.2 Tax Relief on Pension Contributions

Chapter 5: Tax Relief on Pension Contributions

Tax relief is one of the biggest advantages of pension saving — but many people don’t fully understand how it works, or how to claim it.‍

What Is Pension Tax Relief?

When you pay into a pension, the government gives back some of the income tax you’ve already paid — effectively boosting your contributions at no extra cost to you.

This makes pensions one of the most tax-efficient ways to save for retirement.

How Does It Work?

There are two main methods:

1. Relief at Source

 (most personal pensions and group schemes)

• You pay a net amount (e.g. £80), and the provider adds 20% tax relief (e.g. £20), making a total of £100
• Available to all taxpayers (even non-taxpayers up to £3,600 gross)

If you’re a higher or additional rate taxpayer, you can claim the extra 20% or 25% via your tax return

2. Net Pay Arrangement

 (used in some workplace schemes)

• Your pension contributions are deducted before tax is calculated
• You automatically receive tax relief at your full marginal rate
• No need to claim anything — but non-taxpayers receive no top-up under this method

‍‍

Example: How Tax Relief Boosts Your Pension

Note: Higher and additional rate taxpayers must usually submit a self-assessment tax return to reclaim the extra relief when using relief at source.

Annual Contribution Limits & Tax Relief

You can only get tax relief on relevant UK earnings up to your Annual Allowance:

Standard Annual Allowance:

• £60,000 gross (2024/25)
• Includes all personal and employer contributions combined
• If exceeded, you may face a tax charge

Tapered Allowance:

• For high earners with adjusted income over £260,000
• Reduces to £10,000 minimum allowance for those over £360,000 adjusted income

Carry Forward:

• Use unused Annual Allowance from previous 3 tax years
• Must have been a member of a UK pension during those years‍

How to Claim Higher or Additional Rate Relief

If you use a relief at source pension (including most personal pensions or SIPPs), and you earn over £50,270, you must claim extra relief via:

• Self-assessment tax return
• Or by writing to HMRC if you don’t normally file one

Example:

• You pay £8,000 net into your pension
• The provider claims £2,000 = £10,000 total
• If you’re a 40% taxpayer, you can claim another £2,000 back via your return

You can keep the refund or increase your pension further.

Tax Relief for the Self-Employed

• You receive relief in the same way (relief at source)
• Claim any extra through self-assessment
• Up to 100% of your earnings (max £60,000 gross unless tapered)

Can You Claim Tax Relief for Others?

Yes — you can:

• Contribute to a pension for your spouse, partner, or child
• They receive 20% tax relief even if they have no income (up to £3,600 gross)
• You don’t receive tax relief personally — it’s attached to their pension

Common Pitfalls

• Failing to claim higher/additional rate relief
• Confusing net vs gross contributions (especially for limits)
• Making large contributions after stopping work — may not qualify for tax relief
• Assuming employer contributions count toward your personal earnings — they don’t

‍

Next Chapter Preview:

We look at the Annual Allowance in more detail — including tapering, carry forward, and how to avoid a tax charge.

‍