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How pension tax relief works

Putting money into a pension is one of the most tax-efficient things you can do with your savings. The government tops up your contributions at your marginal rate of income tax, so £100 in your pension pot costs a basic rate taxpayer just £80, a higher rate taxpayer £60 and an additional rate taxpayer £55. Over a working lifetime, that difference compounds into a serious sum.

The exact way relief reaches you depends on the type of scheme you're in, and it's worth knowing which one you have, because the mechanics can affect how much you actually receive and whether you need to claim anything back.

The annual allowance: your yearly limit

For the 2024/25 tax year the annual allowance is £60,000. This is a limit on the total paid into your pension in a tax year, and it's easy to forget that it covers three things rather than just your own contributions:

• your own contributions, including any tax relief added
• contributions made by your employer
• contributions to any other pension you pay into, such as a personal pension or SIPP alongside a workplace scheme

There's also an earnings cap. You can generally only get relief on contributions up to 100% of your relevant UK earnings. If you earn very little or nothing at all, you can still contribute up to £3,600 gross each year and receive basic rate relief on it.

Tapered allowance for higher earners

If your income is high, your annual allowance shrinks. For 2024/25, tapering applies when your threshold income is over £200,000 and your adjusted income is over £260,000. Threshold income is broadly your taxable income after certain deductions, while adjusted income adds back pension contributions.

Where both tests are met, the allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. Someone with adjusted income of £300,000 would therefore have an annual allowance of £40,000 — a £20,000 reduction. This catches far more people than you might expect, including those who receive a large bonus or belong to a generous final-salary scheme.

Watch out too for the money purchase annual allowance. If you've flexibly accessed a defined contribution pension — by taking an income drawdown payment, for instance — your allowance for further contributions drops to £10,000.

Carry forward: a useful cushion

If you haven't used your full annual allowance in the previous three tax years, you can carry the unused amount forward. This lets you make a larger contribution in a single year without triggering an immediate tax charge.

• You must have been a member of a registered pension scheme in the year you're carrying forward from, even if you didn't pay in.
• You use the current year's allowance first, then the oldest unused year.
• You still can't contribute more than 100% of your earnings in the year you make the payment.

Carry forward is especially useful for irregular earners, business owners who pay themselves in dividends, and anyone receiving a one-off windfall such as an inheritance or bonus.

Relief at source, net pay and salary sacrifice

Most personal pensions and SIPPs operate relief at source. You pay £80 and the provider claims £20 in basic rate relief from HMRC. If you're a higher or additional rate taxpayer, you claim the extra through Self Assessment — it doesn't arrive automatically, and plenty of people miss it.

Workplace schemes often use a net pay arrangement, where contributions come out of your pay before tax is calculated. That's simple and immediate, but it means lower earners who don't pay income tax get no relief at all on those contributions.

Salary sacrifice works differently again. You agree to give up part of your salary in return for employer pension contributions. This saves income tax and National Insurance for you, and can save employer NI too. Where your employer passes that saving on, it's one of the most efficient ways to boost your pot.

Practical checks before 5 April

The tax year ends on 5 April, and a little planning in the weeks beforehand can make a real difference.

• Add up every contribution — yours, your employer's and any tax relief — to see how much of the £60,000 you've used.
• Check whether tapering applies if your income sits near or above £200,000.
• Think about timing: if you're close to a threshold, delaying or bringing forward a bonus payment can affect your allowance.
• If you're due higher rate relief, don't forget to claim it through Self Assessment.
• Keep records of contributions and carry-forward calculations in case HMRC asks questions later.

None of this needs to be daunting. Once you understand the limits and how relief actually reaches you, you can contribute with confidence — and keep more of your money working towards your retirement.