Methods of giving pension tax relief

Introduction

Pension tax relief ensures individuals do not pay tax on earnings they contribute to a pension. Different mechanisms apply depending on whether contributions are made personally or by an employer. Understanding these methods helps individuals choose the most efficient approach.

Eligibility – who can make personal contributions

To be eligible to make a personal contribution the member must be what’s termed a ‘UK relevant individual’ – this includes all UK residents. The maximum contribution that a member can make in a tax year is the higher of 100% of their UK relevant earnings, or £3,600 (known as the basic amount).

1. Net pay – full relief for taxpayers at source

Under net pay, contributions are deducted from salary before income tax is calculated, so relief is given automatically. This is only available through occupational schemes, and all members must use the same method.

This method benefits higher rate taxpayers who automatically receive full tax relief without needing to claim from HMRC.

Low earners may lose out because they do not receive the 20% uplift on income they weren’t taxed on. Government top‑ups are planned, with first payments expected in 2026 for the 2024/25 tax year. HMRC should contact eligible individuals and invite them to provide the necessary details for the top up payment to be made. Payments go to their bank account, not the pension, so outcomes will differ from relief at source.

2. Relief at source – basic rate relief into pensions

Relief at source applies to all personal pensions and some workplace schemes, where contributions are paid net of basic rate tax and the provider claims 20% tax relief from HMRC. Higher earners can claim additional relief via self assessment, while non- and lower-rate taxpayers still receive the 20% top up on eligible contributions.

Higher rate and additional rate taxpayers can claim relief above the basic rate by entering the gross contribution on their self assessment return, or by contacting HMRC online or by letter. It is no longer possible to do this over the phone.

HMRC gives this extra relief by extending the basic‑rate tax band, reducing the tax owed. There’s no limit to the contributions that qualify for tax relief up to earnings in the tax year they are paid. However, going over the annual allowance (including any carry forward) triggers an annual allowance charge, which effectively removes the benefit on the excess.

3. Employer contributions – tax relief for the business

Employers receive corporation tax relief as pension contributions are classed as a deductible business expense. The full gross amount goes directly into the pension.

Contributions must be “wholly and exclusively” for the purposes of the business and appropriate for the employee’s role.

These contributions are not restricted by earnings but count towards the employee’s annual allowance. Any excess amounts may trigger an annual allowance charge but will not impact the employer’s tax relief.

4. Salary sacrifice – most tax efficient overall

Salary sacrifice reduces salary in exchange for higher employer pension contributions. This gives full income tax relief and reduces National Insurance for both employer and employee.

Reduced salary may affect salary‑linked benefits and some state entitlements.

From 6 April 2029, the amount of salary that can be sacrificed and qualify for National Insurance relief will be capped at £2,000 per year.