Pension Tax Relief UK: Net Pay vs Relief at Source Explained

Why pension tax relief is confusing — and why it matters

Pension contributions in the UK benefit from income tax relief, meaning the government effectively adds money to your pension pot equal to the income tax you would have paid on that amount. A basic-rate taxpayer contributing £80 to a pension effectively gets a £100 pension contribution — the government tops up the £20 of basic-rate tax.

The mechanics of how this relief is delivered vary by scheme type. The three arrangements — Net Pay, Relief at Source, and Salary Sacrifice — deliver the same result for most people in theory, but in practice they have important differences, particularly for lower earners and higher-rate taxpayers.

Understanding which arrangement your scheme uses, and whether you're getting all the relief you're entitled to, can be worth hundreds or thousands of pounds per year.

Method 1: Net Pay

In a net pay arrangement, your pension contribution is deducted from your gross salary before income tax is calculated.

How it works in practice:

Your employer calculates your income tax on the salary after removing the pension contribution. Because less of your salary is taxable, your income tax bill falls — and that reduction is your tax relief. It happens automatically through payroll.

Worked example: net pay, basic-rate taxpayer, £35,000 salary

The £1,750 pension contribution costs you only £1,400 in take-home — because £350 of income tax is saved automatically through payroll. The "real" cost per £1 contributed is 80p.

The net pay problem for non-taxpayers and low earners:

If you earn below the Personal Allowance (£12,570), you pay no income tax. In a net pay scheme, there is no tax to save — and HMRC does not separately add any relief. Your pension contribution is deducted from gross pay, but because your taxable income was already zero, the deduction provides no benefit.

An employee earning £11,000 in a net pay scheme who contributes £500 to a pension simply has £500 less take-home — they receive no government contribution of any kind. In a relief at source scheme, they would have received £125 from HMRC (25% of £500 gross = £125 top-up, even with no tax paid).

The government recognised this injustice and consulted on a fix in 2023–24, but as of 2026 no legislative change has been implemented. Approximately 1.3 million lower-paid workers (many of them women in part-time roles) are losing out.

Method 2: Relief at Source

In a relief at source scheme, the pension provider claims basic-rate tax relief from HMRC on behalf of the member and adds it directly to their pension pot. You pay contributions from your net (after-tax) pay, and the pension provider tops up by 20%.

How it works:

• You contribute £80 from your net pay
• The pension provider claims £20 basic-rate relief from HMRC
• Your pension pot receives £100 total
• This mirrors the effect of net pay for a basic-rate taxpayer — but the mechanism is different

Benefit for non-taxpayers and low earners

In a relief at source scheme, HMRC pays the 20% basic-rate relief regardless of whether you paid any income tax. A worker earning £10,000 (below the Personal Allowance) who contributes £400 of their net pay will have their pension pot topped up to £500. They pay no income tax — but they still receive the £100 government contribution.

This is the key advantage of relief at source over net pay for low earners.

The higher-rate taxpayer problem

For higher-rate and additional-rate taxpayers, relief at source only automatically provides basic-rate (20%) relief. The additional relief — 20% for higher-rate taxpayers, 25% for additional-rate — must be claimed separately via Self Assessment.

Worked example: relief at source, higher-rate taxpayer, £60,000 salary

If this taxpayer does not file Self Assessment, they miss £750 per year in unclaimed tax relief. Over a 20-year career contributing 5% of a £60k salary, that is £15,000 in lost relief — a significant amount.

How to claim: on the Self Assessment return, enter the total gross pension contributions (net contributions plus basic-rate top-up) in Box 1 of the "Pensions" section. HMRC adjusts the tax code or issues a repayment.

Method 3: Salary Sacrifice — the gold standard

Salary sacrifice is the most tax-efficient pension contribution mechanism available to employees. It is not a pension scheme type in itself but rather a contractual arrangement where you agree to give up a portion of your salary in exchange for your employer making a higher pension contribution on your behalf.

Why salary sacrifice is better than net pay or relief at source:

• No Income Tax on the sacrificed amount (same as net pay)
• No National Insurance on the sacrificed amount — neither employee NI nor employer NI
• Employer may pass on some or all of their NI saving (15% from April 2026) as an additional pension contribution

Worked example: salary sacrifice vs net pay, £40,000 salary

Comparison of contributing £2,000/year (5%) via salary sacrifice versus net pay arrangement:

Wait — in salary sacrifice, the NI-able salary is also reduced:

Salary sacrifice saves £160/year in employee NI at £40,000 — on top of the same income tax saving as net pay. At £60,000 (higher rate), the combined IT + NI saving from salary sacrifice vs relief at source (assuming the SA claim is made) is:

The difference narrows at higher salaries (as more of the sacrifice sits above the upper earnings limit where NI is only 2%), but salary sacrifice is still always equal to or better than other methods.

Employer NI saving: from April 2026, employer NI is 15% on salary above £5,000. For every £1,000 of salary sacrifice, the employer saves £150 in employer NI. Many employers pass this back as an enhanced contribution — ask your HR team.

Comparison table: all three methods

How to check which scheme you're in

1. Your payslip: look at where the pension deduction appears. If it reduces the "gross for tax" or "taxable pay" figure, you're in net pay or salary sacrifice. If the deduction comes after tax, you're in relief at source.
2. Your pension scheme welcome pack: will explicitly state the relief method.
3. Ask HR or your payroll team — they are obliged to tell you.
4. Your online pension account: most providers (Nest, Aviva, Scottish Widows, Legal & General) state the relief method in the scheme documentation.

Action items based on your situation

Non-taxpayer or earner below £12,570 in a net pay scheme: check whether your employer can switch to relief at source or salary sacrifice. If not, you are losing the government contribution you would receive in an alternative scheme. Lobby your employer or explore Personal Pension (SIPP) options separately.

Higher-rate taxpayer in relief at source: file Self Assessment and claim the additional relief each year. Use box "Payments to registered pension schemes" on your SA return. Don't leave money on the table.

Any employee with salary sacrifice available: take it. It is the most efficient option — particularly now that employer NI is 15% and may be passed back.

Sources

• HMRC: Tax relief on pension contributions
• HMRC: Relief at source: pension scheme administrator guidance
• The Pensions Regulator: Automatic enrolment detailed guidance no.5
• HMRC: Net pay arrangements
• Low Incomes Tax Reform Group (LITRG): Net pay arrangements and low earners
• House of Commons Library: [Net pay pension contributions — low earners issue, 2024]