Do you know how tax relief on your pension contributions works?

What is pension tax relief and who can get it?

When you save into a pension, the government usually gives you a top up as a way of encouraging you to save for your future. This top up comes in the form of tax relief.

Tax relief is only given on pension contributions if:

• You are under age 75,
• You are UK resident, and
• You make a gross contribution of up to the higher of (a) your UK relevant earnings or (b) £3,600 gross (which is £2,880 as a net contribution to your pension – that is, the amount you pay in).

The last point means that if your pension uses the ‘relief at source’ method of tax relief and you earn, say, £5,000 in the 2023/24 tax year, you can make a gross contribution of up to £5,000 into that pension. This equates to a net contribution of £4,000, because the pension scheme will claim tax relief of £1,000. If you earn less than £3,600, you are limited to tax relief on a gross contribution of £3,600 (£2,880 net). In either case, the fact that you do not pay any income tax does not prevent the pension scheme claiming the tax relief.

If your pension scheme does not use the ‘relief at source’ method, then tax relief is instead given by deducting the gross pension contribution from your UK relevant earnings in your income tax computation. You can read more about how tax relief is given below.

Example

Steven is a stay-at-home dad. He does not work in the 2023/24 tax year. He does, however, have some savings in a bank account and he wants to put some of the money into his personal pension.

Even though he does not have any UK relevant earnings in 2023/24, Steven can pay £2,880 into his personal pension. The scheme provider claims tax relief from HMRC of £720, so £3,600 in total goes into Steven’s pension pot.

How much tax relief do I get?

Tax relief is available on your pension contributions at the highest rate of income tax that you pay. So, for non-Scottish taxpayers, this means:

• Non-taxpayers (that is, people who earn under the personal allowance) get no pension tax relief – unless they are in a ‘relief at source’ scheme – see below for more information
• Basic-rate taxpayers get 20% pension tax relief
• Higher-rate taxpayers get 40% pension tax relief
• Additional-rate taxpayers get 45% pension tax relief

In Scotland, there are different income tax rates so pension tax relief is applied in a slightly different way – see our question below on Scottish taxpayers for more information.

Wales has also introduced a Welsh income tax, as explained below, but as the tax rates are the same for 2023/24 as for the rest of the UK (excluding Scotland), tax relief on pension contributions is available as shown above.

How does pension tax relief work?

The way pension tax relief works differs depending on what kind of pension scheme you are in:

1. If you are in a ‘net pay’ arrangement, the pension contribution is deducted before tax is calculated on your pay (meaning you receive tax relief there and then).
2. If you are in a ‘relief at source’ arrangement, the pension contribution is deducted after tax is calculated and HM Revenue & Customs (HMRC) later send the value of the tax relief to the pension scheme.

Net pay arrangements

Net pay arrangements are used by many traditional occupational (‘works’) pensions and also some workplace pensions set up under auto-enrolment, and do not require you to do anything to get your tax relief.

Your pension contributions are deducted from your salary by your employer before income tax is calculated on it, so you get relief on the amount immediately at your highest rate of tax.

So, if you earn £300 a week, and pay 5% (£15) in pension contributions, you will only pay tax on wages of £285. As you do not pay tax on the £15 of your earnings that you put in as your pension contribution, you are therefore saving tax of £3 (£15 x 20%), meaning your £15 contribution is only really costing you £12.

You do not usually need to put details of pension contributions made in this way on your Self Assessment tax return (if you complete one) or tell HMRC about the contributions in any other way at all. This is because exactly the correct amount of tax relief is usually given on the contribution via the payroll and there is nothing else to do.

Occasionally, full relief on pension contributions to a net pay arrangement might not be given through the payroll and a claim for relief will need to be made. HMRC’s pensions tax manual explains this.

Relief at source

Relief at source arrangements are used by personal and stakeholder pensions (that is, pensions set up with an insurance company) and some auto-enrolment workplace pensions.

If, you are a 20% taxpayer (a basic-rate taxpayer), you will make your pension contributions to this type of scheme out of income that has already had 20% tax deducted.

Therefore, if you are paying into a pension through your employer, your employer will only take 80% of your total pension contribution from your salary and send it to your pension scheme. Your pension scheme then sends a request to HMRC, who pay an additional 20% tax relief into your pension.

So, again, if you earn £300 a week, and pay 5% in a pension contribution, you will only actually have £12 deducted from your pay, and the government will put £3 into the pension scheme by way of tax relief at a later date. This tops up your £12 contribution to £15.

If you are a 20% taxpayer, there is no further adjustment that needs to be made. However, under this system, higher and additional-rate taxpayers must make a claim to receive the extra relief due to them.

If you are a higher or additional rate taxpayer and you normally complete a Self Assessment tax return, tell HMRC about your pension contributions – and claim any tax relief – by completing the appropriate section on your tax return. If you do not complete a tax return, you can give the details on form P810 Tax Review – this is not available online and is only available by contacting HMRC. However, you can also give HMRC details of pension contributions online, via your Personal Tax Account.

If you pay tax through PAYE, HMRC can give you any relief through your tax code – meaning any refund will be paid when your wages or pension is paid to you, generally by way of a lower tax deduction than you would otherwise have suffered. The amount of relief given through your tax code will, however, only be an estimate unless you can say exactly how much you will pay into a relief at source pension scheme during the coming year. If not, you may have to obtain a refund directly from HMRC, or if too much estimated tax relief is included in your code, you might have to pay the balance after the end of the tax year.

Pension tax relief for low earners: what problems might arise?

If you are a low earner (that is, if you earn below or only just above the personal allowance – £12,570 in 2023/24), you may wish to check which type of pension scheme you are in. If you are in a relief at source arrangement, the pension provider claims 20p tax relief back from HMRC for every 80p of your contribution received – no matter what the level of your earnings. This is subject to the points made above in relation to who can get tax relief.

If you are in a net pay arrangement, you will not get any tax relief if your income is below the personal allowance of £12,570. However, in the 2021 Autumn Budget the government announced that individuals in this situation will be able to claim a payment equal to the tax relief they have missed out on with effect from the 2024/25 tax year.

Example

Jo earns £950 per month. Jo puts in £15 of her pay into her pension scheme every month. The pension scheme operates under net pay arrangements, so her employer deducts the pension contribution before calculating tax. This means Jo’s earnings are taken to be £935 for tax purposes instead of £950. However, as Jo’s earnings fall below the usual monthly threshold for paying income tax (£1,048 for 2023/24), this reduction in taxable income makes no difference and she gets no tax relief on the contributions paid.

If Jo was in a relief at source scheme, her taxable employment income would be £950 a month. She would still not pay any tax, but she would only have to put 80% of £15 (that is, £12) of her pay into her pension pot – the rest is paid into it for her by the government. She is therefore £3 a month, or £36 a year, better off under a relief at source scheme.

What is salary sacrifice?

Many employers offer to run their employees’ pension schemes in conjunction with a salary sacrifice arrangement. They do this because it saves both you and them National Insurance contributions (NIC).

To explain: an employee’s pension contributions usually attract tax relief (provided they are a taxpayer), but they do not ordinarily attract NIC relief. This means that an individual pays income tax on the amount after pension contributions have been deducted, but pays NIC on the amount before the pension contributions have been deducted. However, if an employer makes a contribution to an employee’s pension scheme, then there is no tax or NIC to pay on the value of the contribution.

Under a pensions salary sacrifice arrangement, you agree to give up part of your salary in return for your employer making a larger contribution to your pension pot. This can save you money because the NIC you would be due to pay are calculated on the smaller salary. Your employer would pay any employer’s NIC on the smaller salary too. You may also benefit from more pension contributions from your employer, if they are willing to contribute some of the money they are saving on employer’s NIC.

A salary sacrifice arrangement involves altering your employment contract to give up a portion of your earnings. This may affect future calculations of pensions, redundancy pay, statutory maternity pay, paternity pay, shared parental pay, etc. You should make sure you are clear on these employment law aspects before deciding to enter into a salary sacrifice arrangement so you fully understand how they may affect you in the future.

You should also be aware that a salary sacrifice arrangement is not allowed to reduce your cash pay below the relevant national minimum wage or national living wage rates. This rule is in place because of fears that people on lower incomes may sacrifice their salary to an amount below the Lower Earnings Limit, that is, the limit at which you start to accrue entitlements under the social security system. Your employer should be keeping an eye on this, but there is no harm you doing so too.

If you are paid slightly more than the minimum wage, it is important to watch out for any changes to the minimum wage rates. This is because a rise in the minimum wage rate could affect your ability to enter into, or remain in, a salary sacrifice scheme.

Important note about salary sacrifice for low earners in relief at source schemes

As we have seen above, even if you are a low earner and do not pay tax, you still get a 20% top up into your pension pot if you are in a relief at source scheme. However, if your employer offers you a salary sacrifice arrangement, you will lose the 20% top up into your pension pot, so could find yourself worse off.

This is probably best explained by looking at an example:

Dave earns £11,500 per year (£221.15 per week). He is paid at just above the minimum wage. The personal allowance of £12,570 (for 2023/24) means he pays no tax. Employee NIC is only due on earnings over £242 a week so he will not pay employee NIC for 2023/24 tax year. He is in a relief at source pension scheme. His contribution amount is £5.15 per week (which works out as a net contribution of £4.12 – that is, 80% of £5.15).

With no salary sacrifice arrangement, his weekly payslip in 2023/24 will look something like this:

Gross Pay		Deductions
Employment	£221.15	Tax	£0.00
		Employee NIC	£0.00
		Pension	£4.12
Net Pay	£217.03

Although Dave has only had £4.12 deducted from his salary, £5.15 will end up in his pension as £1.03 extra will be sent to the pension scheme by HMRC.

However, with a salary sacrifice arrangement, his weekly payslip will look something like this:

Gross Pay		Deductions
Employment (£221.15 less £5.15)	£216.00	Tax	£0.00
		Employee NIC	£0.00
Net Pay	£216.00

In this scenario, since Dave does not pay any employees NIC, he does not get any benefit of a National Insurance saving. This means that a salary sacrifice arrangement costs him £1.03 more than if the contribution were made out of his after-tax pay.

What differences are there for Scottish taxpayers?

The different tax rates that apply for Scottish taxpayers have the following effect on pensions tax relief:

For net pay schemes: tax relief will be given immediately at your marginal rate of tax – that is, 0%, 19%, 20%, 21%, 42%, 47%.

For relief at source schemes: Non-taxpayers and basic rate taxpayers get tax relief at the basic rate of 20%. Scottish taxpayers who pay the Scottish starter rate of income tax at 19% will get tax relief at 20% on personal contributions. HMRC have confirmed that they will not recover the 1% difference.

Those paying 21%, 42% or 47% can claim extra relief in the same way as those in the rest of the UK. See above: How does pension tax relief work?

An anomaly therefore exists for Scottish taxpayers whereby 19% taxpayers in relief at source arrangements get 20% tax relief, whereas 19% taxpayers in net pay arrangements only get 19% tax relief.

What differences are there for Welsh taxpayers?

A Welsh income tax came into effect from 6 April 2019. The first affected tax year was therefore 2019/20.

However, for 2019/20, 2020/21, 2021/22, 2022/23 and 2023/24 there is no practical effect on pensions tax relief as when the Welsh income tax rate is taken into account, the overall tax rate remains the same as if you were a UK taxpayer.

How do pension contributions interact with tax credits and universal credit?

If you get a means-tested benefit like universal credit or tax credits, your pension contributions reduce the amount of income that is taken into account in assessing your award. This could mean a higher award.

For example, universal credit’s ‘taper rate’ of 55p in the pound means that a £100 pension contribution over the course of a year could result in a £55 increase in your UC award depending on your level of award and circumstances.

You should check the position carefully for whatever benefit you are claiming. The steps you need to take to make sure the authorities know about your pension contribution amounts might depend on whether you are in a net pay scheme or relief at source.

For example, tax credits are based on gross income – before tax and National Insurance contributions are deducted. If you make contributions under a net pay arrangement then the taxable income figure on your P60 will already reflect your pension contributions. You will not need to make any further adjustments for pension contributions.

But the gross income figure from your P60 will not reflect any relief at source pension contributions and you will therefore need to deduct your pension contribution amount from your income figure when you report it to HMRC. The amount to deduct is the amount of pension contribution grossed up by 100/80 (this means you multiply the amount you paid by 100 and then divide the amount by 80) – to reflect the 20% top up that will be claimed from HMRC by your pension scheme.

For example, Rosin pays £50 into a relief at source pension in the 2023/24 tax year. The amount that can be taken off her tax credits income is 50 multiplied by 100 and divided by 80 – that is, £62.50.

You can read more about this on our website for advisers, RevenueBenefits.

Where can I find more information?

You can find some basic information about tax relief on GOV.UK.

You can find more information on pensions and auto-enrolment on our website, and read about how taking money out of pensions can affect amounts you can pay in.

You can find out more about saving into a pension, including more on salary sacrifice, on MoneyHelper.