Answers · UK 2025/26

How does UK pension tax relief work?

Pension contributions get tax relief at your marginal rate. Basic-rate (20%) is automatic via "relief at source" or salary; higher-rate (40%) and additional-rate (45%) reclaim the extra 20%/25% via Self Assessment or HMRC tax code adjustment.

Last updated: 6 April 2025Last reviewed: 6 April 2025How we verify

Full answer

UK pension tax relief mechanics 2025/26. Two methods. (1) Relief at source — used by most personal pensions and SIPPs. You contribute net (e.g. £80), the provider claims 20% back from HMRC and adds £20 to your pension (£100 gross). Higher/additional-rate taxpayers must claim the extra 20%/25% themselves via Self Assessment or letter to HMRC — many people miss this. (2) Net pay / salary deduction — used by most workplace pensions. Contribution deducted from gross pay before tax — automatic full marginal-rate relief. (3) Salary sacrifice — even better; pre-tax pre-NI sacrifice saves Income Tax + employee NI + employer NI (often returned to you). Limits. Annual Allowance £60,000 (or 100% of relevant earnings if lower). Tapered Annual Allowance: reduces £1 per £2 of adjusted income over £260,000, minimum £10k. Money Purchase Annual Allowance £10,000 after any taxable pension drawdown. Carry-forward: unused AA from 3 previous years (must have been pension scheme member). Worked example for £50k earner contributing £5k. Net pay: £5k deducted from gross → £1k tax + £400 NI saved = £1.4k effective uplift; £3.6k net cost for £5k in pension. Higher-rate (45k+): full 40% tax relief on £5k = £2,000 saved. Salary sacrifice adds employer NI 15% = £750 — many employers add back to your pension.