Tax Relief on Pension Contributions UK
Last updated: February 2026 | Author: Mustafa Bilgic (MB)
A complete guide to pension tax relief in the UK for 2025/26: how relief at source works, claiming higher and additional rate relief, the annual allowance, carry forward rules, salary sacrifice, and the most effective strategies for maximising pension tax efficiency.
What Is Pension Tax Relief?
Pension tax relief is one of the most valuable features of the UK pension system. When you contribute to a registered pension scheme, the government effectively refunds the income tax you would have paid on that money — because pension contributions are made from pre-tax income. This means that a basic rate taxpayer who wants to put £100 into their pension only has to sacrifice £80 of take-home pay; the other £20 comes from HMRC as tax relief.
The principle is simple: the government wants to encourage saving for retirement, so it removes the income tax on money that goes into a pension. The money is only taxed when it comes out at retirement (except for the 25% tax-free lump sum). This deferral of tax is enormously powerful for long-term wealth building.
Tax Relief Rates: 20%, 40%, and 45%
The rate of pension tax relief matches your marginal rate of income tax:
| Taxpayer Type | Tax Rate | Relief Rate | Cost of £100 Pension | Net Cost |
|---|---|---|---|---|
| Basic Rate | 20% | 20% | £100 → £80 net cost | £80 |
| Higher Rate | 40% | 40% | £100 → £60 net cost | £60 |
| Additional Rate | 45% | 45% | £100 → £55 net cost | £55 |
How Relief at Source Works
The most common method of delivering pension tax relief in the UK is "relief at source." This is how it works in practice:
- You contribute to your pension from your net (after-tax) pay.
- The pension provider claims 20% basic rate tax relief from HMRC on your behalf.
- This 20% top-up is added to your pension pot, typically within a few weeks of your contribution.
- If you pay 40% or 45% tax, you must claim the additional 20% or 25% through Self Assessment.
You contribute £800 (net) to your SIPP.
Provider claims 20% relief: £200 added → £1,000 in your pension pot.
You claim additional 20% via Self Assessment: £200 refund.
Net cost: £600 for £1,000 pension contribution.
Net Pay Arrangements
Some workplace pensions — particularly those in the public sector and some larger employers — use a "net pay" arrangement. In this case, your pension contributions are deducted from your gross salary before income tax is calculated. You automatically receive full tax relief at your marginal rate without needing to claim anything. However, workers paying no income tax (earning below £12,570) do not receive any automatic relief under net pay arrangements — a known anomaly in the system that HMRC has been working to address.
The Annual Allowance 2025/26: £60,000
The annual allowance (AA) is the maximum amount of pension contributions that can receive tax relief in a single tax year. For 2025/26, the annual allowance is £60,000. This includes:
- Your own contributions to all pension schemes
- Your employer's contributions on your behalf
- For defined benefit (DB) pensions: the "pension input amount" — the notional cost of the pension growth during the year, calculated using a factor of 16x the increase in annual pension
If total pension inputs exceed £60,000 in a tax year, a tax charge (the "annual allowance charge") is levied on the excess at your marginal rate. This charge is collected through your Self Assessment tax return. The charge effectively removes the tax relief on contributions above the allowance.
The Money Purchase Annual Allowance (MPAA): £10,000
Once you start flexibly accessing a defined contribution pension — for example, by taking taxable income through drawdown — your annual allowance for money purchase (defined contribution) pensions is permanently reduced to £10,000. This is the Money Purchase Annual Allowance.
The MPAA is designed to prevent "pension recycling" — the practice of drawing pension income and re-investing it into a new pension to claim relief again. The MPAA does not apply to the defined benefit component of hybrid pensions, which still gets a separate allowance.
Importantly, the MPAA is not triggered by:
- Taking your 25% tax-free lump sum without accessing the taxable portion
- Buying a lifetime annuity
- Taking small pots (under £10,000) under the small pots rules
Lifetime Allowance — Abolished April 2024
The pension lifetime allowance (LTA) — previously the maximum total pension wealth you could accumulate in registered schemes without a tax surcharge — was abolished with effect from 6 April 2024. There is no longer a lifetime allowance charge. You can accumulate an unlimited amount in pension savings without worrying about breaching a lifetime cap.
However, the Pension Commencement Lump Sum (PCLS) — the tax-free cash you can take at retirement — remains capped at £268,275 (25% of the old lifetime allowance of £1,073,100). Taking the maximum tax-free cash above this amount is no longer possible, even if your pension pot exceeds £1,073,100.
Individuals who previously had LTA protection (enhanced protection, fixed protection, or individual protection) still benefit from their higher PCLS entitlement under transitional rules.
Carry Forward Rules
If your pension contributions in a given year are less than the annual allowance, you can carry forward unused allowance from the previous three tax years. This is particularly useful if you have received a windfall, sold a business, or want to make a large one-off contribution.
2022/23: Annual allowance £40,000. Contributions: £15,000. Unused: £25,000.
2023/24: Annual allowance £60,000. Contributions: £20,000. Unused: £40,000.
2024/25: Annual allowance £60,000. Contributions: £10,000. Unused: £50,000.
2025/26: Annual allowance £60,000 + carry forward £25,000 + £40,000 + £50,000 = £175,000 maximum.
(Subject to earning £175,000 or more in 2025/26, as contributions cannot exceed 100% of earnings.)
Key carry forward rules:
- You must have been a member of a registered pension scheme in every year you wish to carry forward from (even if no contributions were made)
- You must use the current year's allowance fully before using carry forward
- Contributions cannot exceed 100% of your UK earnings in the current year
- The MPAA cannot be increased by carry forward — it remains at £10,000 for money purchase pensions once triggered
- Years fall off after three years: 2021/22 unused allowance will no longer be available from 6 April 2025
Salary Sacrifice Pensions
Salary sacrifice is one of the most tax-efficient ways to contribute to a pension. In a salary sacrifice arrangement, you and your employer agree to reduce your gross salary, and the employer pays the sacrificed amount directly into your pension instead. Because your gross salary is lower:
- You pay less income tax (your taxable income is lower)
- You pay less National Insurance (employee NI: 8% on earnings between £12,570–£50,270)
- Your employer pays less employer NI (13.8% on the sacrificed amount)
Sacrifice £2,000 per year into pension.
Income tax saving (20%): £400
Employee NI saving (8%): £160
Total personal saving: £560 — meaning a £2,000 pension contribution costs only £1,440 in net take-home.
Employer NI saving (13.8%): £276 — often added to your pension as additional contribution.
Salary sacrifice is not available from all employers. It requires a formal agreement to change your employment contract terms. Benefits-related calculations (e.g., statutory maternity pay, death in service benefits) may be based on the reduced salary, so check the implications with your employer's HR team.
How to Claim Higher Rate Pension Tax Relief
If you pay 40% or 45% income tax and your pension operates under the relief-at-source method, you must actively claim the additional tax relief. HMRC does not add it automatically. Here is how:
Self Assessment Tax Return
The most common route is through your annual Self Assessment tax return. In the pension contributions section, enter the gross amount of your personal pension contributions (the amount you paid plus the 20% already added by the provider). HMRC calculates the additional relief and either reduces your tax bill or issues a repayment.
Contacting HMRC Directly
If you do not complete Self Assessment, you can contact HMRC to inform them of your pension contributions. They can adjust your PAYE tax code to give you the relief through reduced tax deductions. Call HMRC on 0300 200 3300 or use the online Government Gateway to update your tax code.
How Much Can You Claim Back?
The additional relief is the difference between the basic rate (20%) already claimed and your actual tax rate. For a higher rate (40%) taxpayer, this is an additional 20% of the gross contribution. For an additional rate (45%) taxpayer, this is an additional 25%.
Net contribution paid: £4,000
20% basic rate relief added: £1,000 → Gross contribution: £5,000
Additional 20% higher rate relief: £1,000 (claimed via Self Assessment)
Total effective cost: £3,000 for £5,000 in your pension
The Tapered Annual Allowance
Higher earners face a reduced annual allowance. The taper applies if both of these conditions are met:
- Threshold income (income before pension contributions) exceeds £200,000
- Adjusted income (income including all pension inputs) exceeds £260,000
The annual allowance is reduced by £1 for every £2 of adjusted income above £260,000. The minimum tapered annual allowance is £10,000, reached at adjusted income of £360,000 or above.
Personal pension contributions reduce threshold income, which may prevent the taper from applying. For example, a senior executive with £210,000 of employment income who makes £15,000 in personal pension contributions would have threshold income of £195,000 — below the £200,000 threshold — and would not be tapered.
Pension Tax Relief for Non-Earners and Low Earners
Even people with no income can contribute to a pension and receive tax relief, up to a limit. Non-earners can contribute up to £3,600 gross per year (£2,880 net, with £720 basic rate relief added). This is useful for contributions on behalf of children, non-working spouses, or partners with low income.
Workers earning below the Personal Allowance (£12,570) who are in a relief-at-source scheme also receive the 20% top-up on contributions up to £3,600 gross — even though they pay no income tax. This is a statutory quirk that has been retained in the system.