What is pension tax relief?
The amount of tax relief you receive depends on your pension scheme and your Income Tax band.
Basic-rate taxpayers pay tax at 20%.
This means that for every £100 paid into a pension, you contribute £80 and the government adds £20 in tax relief, bringing the total contribution to £100.
Higher and additional-rate taxpayers (40% and 45%) may be able to claim more tax relief.
While the first 20% is usually applied automatically by the provider, you can claim the remaining amount up to your highest marginal tax rate through your tax return or by contacting HMRC.
You can usually claim back up to four tax years of unclaimed higher-rate pension tax relief, provided the contributions were eligible when they were made.
How is pension tax relief applied?
There are three ways you may receive pension tax relief, depending on how your personal, stakeholder or (in some cases) workplace pension is set up.
Relief at source
Your pension provider claims basic-rate tax relief from the government and adds it to your pension automatically.
Net pay arrangement
Your contributions are taken from your gross pay before Income Tax is calculated. This means you receive tax relief straight away through your payroll.
Salary sacrifice
Salary sacrifice pension contributions are treated as employer contributions. This means you do not receive tax relief in the standard way, but you may benefit from paying less Income Tax and National Insurance because your salary is lower.
An update to salary sacrifice pension contributions
From April 2029, only the first £2,000 of employee pension contributions through salary sacrifice each year will be exempt from NICs. Contributions through salary sacrifice, like all pension contributions, will still be exempt from Income Tax (subject to the usual limits).
READ MORE ABOUT UPCOMING CHANGES TO PENSION SALARY SACRIFICE
How much tax relief on my pension contributions can I receive?
Up to the age of 75, you receive tax relief on your pension contributions up to 100% of your earnings or your annual allowance, whichever is lower. The annual allowance is currently £60,000 and includes all payments into your pension, including employer contributions.
Pension contributions made after the age of 75 are not eligible for pension tax relief.
Can I pay into someone else’s pension?
You will need to check whether the pension provider allows third-party contributions. If you can pay into someone else’s pension, they will receive the tax relief, not you, even though you are making the contributions.
How are private pensions taxed?
In the UK, private pensions generally follow an “exempt, exempt, taxed” (EET) model for Income Tax:
• Exempt: you do not pay Income Tax on pension contributions, although there are limits on how much can qualify for tax relief.
• Exempt: you do not pay Income Tax if your pension investments increase in value, through investment growth, dividends or interest
• Taxed: withdrawals from pensions are generally subject to Income Tax like other income. However, you can normally withdraw up to 25% of your pension as a tax-free lump sum.
In the Autumn Budget 2024, it was announced that private pensions would be considered for Inheritance Tax (IHT) purposes from April 2027.
READ ABOUT INHERITANCE TAX AND PENSIONS
Get in touch with our independent financial advisers
If you would like to discuss anything mentioned in this article and how it might affect you then we recommend seeking professional, financial advice.
RISK WARNING
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
This article is not intended as advice and does not cover all scenarios.
Pensions can feel complicated, with different rules applying to the State Pension, workplace pensions and private pensions. This guide explains how tax relief works when you pay into a pension.
