Guide · Pensions
UK Pension Tax Relief Explained 2026/27
Pension tax relief is the government's most generous incentive for long-term saving. Put simply, money that goes into a pension has never been taxed — so a higher-rate taxpayer who contributes £1,000 to their pension only costs themselves £600 in after-tax income. In 2026/27, the Annual Allowance is £60,000, carry forward can extend this to up to £240,000, and the Lifetime Allowance has been abolished since April 2024. But there is an urgent new reason to maximise pension contributions: from April 2027, pensions will enter your estate for Inheritance Tax. This guide explains everything: how relief at source, net-pay and salary sacrifice work; the Annual Allowance and carry-forward rules; the Lump Sum Allowance; and why acting before April 2027 matters.
Important: Pensions and IHT — April 2027 change
Currently, pension funds pass outside the estate for IHT purposes. From April 2027, unspent pension pots will be included in your estate at 40% IHT. If you plan to use your pension for estate planning or leave it to beneficiaries, review your strategy now.
Key pension figures — 2026/27
- Annual Allowance: £60,000 (or 100% of earnings)
- Tapered AA threshold: adjusted income above £260,000
- Minimum tapered AA: £10,000
- Carry forward available: up to 3 prior years (max ~£180k extra)
- Lump Sum Allowance (tax-free cash cap): £268,275
- Lifetime Allowance: Abolished April 2024
- Basic-rate relief at source: 20% (government adds 20p per 80p contributed)
- IHT change: pensions enter estate from April 2027
How Pension Tax Relief Works: The Three Methods
1. Relief at Source (RAS)
Used by most personal pensions (SIPPs) and some workplace pensions. You contribute from your net (after-tax) income. The pension provider claims basic-rate tax relief (20%) directly from HMRC and adds it to your pot — so a £800 contribution becomes £1,000 in the pension.
Higher-rate (40%) and additional-rate (45%) taxpayers receive only 20% through the scheme automatically. The additional relief — 20% and 25% respectively — must be claimed via a Self Assessment tax return. This is a common mistake: many higher-rate taxpayers miss out on hundreds of pounds per year by not filing a Self Assessment return to claim the extra relief.
2. Net-Pay Arrangement
Used by many large occupational pension schemes. Contributions are deducted from your gross salary before income tax is calculated — so you automatically receive full relief at your marginal rate (20%, 40% or 45%). There is no separate claim needed.
The drawback: employees earning below the Personal Allowance (who pay no income tax) receive no benefit from net-pay schemes — they get no tax relief at all. This has been a significant policy concern for part-time workers and those on lower wages in occupational schemes. The government has proposed a top-up mechanism for affected workers.
3. Salary Sacrifice
The most powerful method for employed taxpayers. You agree to reduce your gross salary by the pension contribution amount. The employer pays the reduced salary and contributes the sacrificed amount directly to your pension as an employer contribution.
Benefits:
- The contribution leaves your pay packet before income tax or NI — full tax relief at marginal rate automatically
- Employee NI saving (8% below £50,270; 2% above) on the sacrificed amount
- Employer saves employer NI (15%) on the sacrificed amount — many employers pass this saving on as an additional pension contribution
Salary sacrifice worked example (higher-rate taxpayer):
Sarah earns £60,000. She sacrifices £10,000/yr into pension.
- Income tax saving: £10,000 × 40% = £4,000
- Employee NI saving: £10,000 × 2% = £200
- Employer NI saving: £10,000 × 15% = £1,500 (if passed on)
- Total benefit to Sarah: £4,000 + £200 + £1,500 = £5,700 on £10,000 contribution
- Effective net cost to Sarah (if employer NI passed on): £10,000 − £5,700 = £4,300
The Annual Allowance: £60,000
The Annual Allowance is the maximum total pension contribution (personal + employer + salary sacrifice combined) that can receive tax relief in a single tax year. For 2026/27 it is £60,000 or 100% of UK earnings — whichever is lower.
If you exceed the AA, you pay an Annual Allowance Charge at your marginal income tax rate on the excess. The charge is reported on your Self Assessment return. There is no separate "AA tax" — it is simply treated as additional income.
The AA is tapered for very high earners. If your "threshold income" (income before pension contributions) exceeds £200,000 AND your "adjusted income" (income plus employer contributions) exceeds £260,000, the AA reduces by £1 for every £2 above £260,000, down to a minimum tapered AA of £10,000.
Carry Forward: Access Up to £180,000 Extra
If you did not use your full Annual Allowance in any of the three previous tax years, you can "carry forward" the unused amount into the current year. This allows exceptionally large contributions in years when you have surplus income or cash — for example, after selling a business, a large bonus, or an inheritance.
To use carry forward:
- You must have been a member of a registered pension scheme in each of the years being carried forward
- You must use the current year's full £60,000 AA first
- Your total contribution must not exceed your UK earnings in the current year
- There is no requirement to have had earnings in the carry-forward years
Maximum available carry forward for 2026/27: unused AA from 2023/24, 2024/25 and 2025/26 (each up to £60,000) = up to £180,000. Combined with the 2026/27 AA of £60,000, the maximum potential contribution in a single year is up to £240,000.
The Lifetime Allowance: Abolished April 2024
The Lifetime Allowance (LTA) — previously £1,073,100 — was the lifetime cap on the total amount of pension savings that could benefit from tax relief. It was abolished from 6 April 2024. There is now no lifetime limit on how large your pension pot can grow.
However, the Lump Sum Allowance (LSA) of £268,275 limits the total tax-free cash you can draw from all registered pensions combined. Amounts above this are taxed as income when drawn. Previously, the 25% tax-free lump sum was calculated as 25% of the LTA (£1,073,100 × 25% = £268,275) — the same number, now enshrined as the LSA.
Pensions and Inheritance Tax: Urgent Planning Before April 2027
Currently, defined contribution pension funds (SIPPs, personal pensions, many workplace pots) can pass to beneficiaries outside the estate for Inheritance Tax purposes. This makes them an exceptionally efficient estate planning vehicle — you can pass pension wealth to children or grandchildren without 40% IHT.
From April 2027, the government intends to include unspent pension funds in the deceased's estate for IHT. The combined effect of IHT at 40% plus income tax on the beneficiary's drawdown could mean pension wealth is taxed at up to 67% in some scenarios.
Action before April 2027: If estate planning is a priority, consider maximising pension contributions now (while pensions are still IHT-free), reviewing beneficiary nominations, taking income from the pension while directing other assets into ISAs or trusts, or consulting a financial adviser about whether drawdown or annuity purchase ahead of 2027 makes sense for your situation.