How to boost your pension savings with tax relief

What is pension tax relief?

Tax relief means you get a boost on the money you pay into your pension. How it works depends on your pension arrangement with your employer:

  • Relief at source: Your contributions are taken after tax, and the government adds a top up.
  • Net pay: Your contributions are taken before tax, so you pay less tax straight away.

One of the biggest benefits of paying into a pension is that tax relief helps your savings go further.  

For example, if you add £40 a month, your employer adds £30, and the government adds another £10 in tax relief (under relief at source). That’s an extra £40, giving you a total of £80 added to your pension.

How much does the government add to your pension?

How much tax relief you get depends on how much income tax you pay. If you’re a basic rate taxpayer, that’s 20%. If you’re a higher-rate (40%) or additional-rate (45%) taxpayer, you may need to claim additional tax relief through your self-assessment if your pension uses the relief at source arrangement. 

  • With net pay arrangements, you get the full tax relief automatically because your contributions are taken before tax is calculated.
  • If you pay income tax in Scotland, the rules are different. You can find out more about Scottish income tax bands on GOV.UK. 

In most cases, tax relief is applied for you by your pension provider or employer – you don’t have to do anything.

There are two main ways tax relief can be applied:

Your employer takes your contributions from your salary after tax has been paid. If you’re with People’s Pension, we claim back 20% tax relief and add it to your pension savings.

For example, if you contribute £80 from your take-home pay, we’ll claim £20 back in tax relief. You’ll have £100 added to your pension.

Your employer takes your contributions out of your pay before income tax is calculated. Because you pay tax on the amount left, the tax relief is applied straight away.

For example, your gross salary is £1,500 and you contribute £100 a month to your pension. Because your contributions are taken before tax, you don’t pay tax on that £100. At a 20% tax rate, that saves you £20 in tax. So, your contribution only costs you £80.

If you’re not sure which method your employer uses, they’ll be able to tell you. You can find out more about tax relief on MoneyHelper. 

Who qualifies for pension tax relief?

Most people who pay into a pension qualify for pension tax relief. Whether you qualify depends on your income and employment status. 

You will usually qualify if: 

  • You’re paying into an HMRC registered pension scheme, like a workplace pension.
  • You earn taxable income in the UK.
  • You’re under 75. After this age, you generally don’t receive tax relief on pension contributions.

If you’re a higher-rate (40%) or additional-rate (45%) taxpayer:

  • You still qualify for tax relief.
  • You might just need to claim back the extra tax relief (above the basic tax rate of 20%) through self-assessment if you’re on the relief at source arrangement. 

If you earn less than £3,600 a year and your pension provider claims tax relief for you (through the relief at source arrangement, you could get up to £2,880 tax relief on your contributions each year.
 
If you’re not sure whether you receive tax relief:

  • Ask your employer how your pension contributions are taken.
  • Contact HMRC if you think you’re not receiving the tax relief you’re entitled to, especially if you’re a higher-rate taxpayer.

Let us know once you find out, so we can update your details. 

Tax benefits of salary exchange

Salary exchange – also known as salary sacrifice, is a way to boost your pension contributions while saving money on tax. It’s an agreement between you and your employer. You give up part of your salary, and in return your employer pays your total pension contributions (yours and theirs) into your pension. 

Because your salary is reduced, you pay less income tax and National Insurance. This usually means you take home more pay than if you made standard pension contributions. You can use this extra money to top up your pension.

Find out more about how it works on our salary exchange page.

Pension tax relief limits

There is a limit to how much you can save into your pension each tax year and still receive tax relief. This is called the annual allowance.

The annual allowance is currently £60,000 (or 100% of your earnings, whichever is lower). It applies to all contributions, including from your employer, and any tax relief you receive. If the total amount paid into your pension in a tax year is more than the annual allowance, you’ll be charged tax on the excess.

  • Your annual allowance may be lower if you start taking money out of your pension in certain ways. For example, taking a bit at a time, or taking all your pension savings in one go if you have more than £10,000. This can trigger your money purchase annual allowance (MPAA) and reduce how much you can pay into your pension and still get tax relief on. You can find out more about MPAA on our tax and pensions page. 
  • If you want to pay in more than £60,000 in one tax year and still get tax relief, you may be able to use carry forward. This lets you use any unused annual allowance from the last three tax years — if your income is at least equal to the amount you want to contribute.

If you’re unsure how these limits apply to you, it could help to get some guidance or regulated financial advice.