Pension Tax Relief: Relief at Source vs Net Pay Arrangement 2026/27
Two savers on the same salary, contributing the same amount into a pension, can end up with very different experiences depending on how their scheme delivers tax relief. Relief at source and net pay arrangements both eventually get you the tax relief you are entitled to, but they work in opposite directions -- one is automatic for low earners and requires a claim from higher earners, the other is automatic for higher earners but can shortchange low earners entirely. This guide explains how each method works, why low earners can lose out under net pay, how to claim extra higher and additional-rate relief, how salary sacrifice compares, and a worked example showing the identical end result reached by two different routes.
Relief at Source Explained
Under relief at source, your pension contribution comes out of your pay after income tax has already been calculated on your full salary -- so it is deducted from net pay. The pension provider then claims basic-rate tax relief (20%) directly from HMRC and adds it to your pot automatically.
In practice, a £80 contribution from your take-home pay is grossed up to £100 in your pension -- the extra £20 arrives from HMRC, usually within a few weeks, without you doing anything. Most personal pensions, SIPPs and a large share of workplace schemes use relief at source.
The 20% top-up under relief at source is applied automatically regardless of whether you actually pay tax, which is a genuine advantage for non-taxpayers and low earners -- but it also means higher and additional-rate taxpayers only get the basic-rate slice automatically and must claim the rest themselves.
Net Pay Arrangement Explained
Under a net pay arrangement, your contribution is deducted from your salary before income tax is calculated. Tax is then worked out on the reduced figure, so you get relief at your full marginal rate instantly through payroll, with no separate claim.
A basic-rate taxpayer gets 20% relief immediately; a higher-rate taxpayer gets 40% instantly; an additional-rate taxpayer gets 45% instantly -- all baked into the payslip automatically. Many large workplace schemes, including many defined benefit schemes and some trust-based defined contribution schemes, use net pay arrangements.
The trade-off runs opposite to relief at source: net pay is simple and automatic for higher earners, but it can disadvantage people earning below the personal allowance, as the next section explains.
The Low-Earner Anomaly
Because a net pay arrangement reduces taxable pay before tax is calculated, someone earning below the personal allowance (£12,570 for 2026/27) was never going to pay tax on that slice of income in the first place -- so there is no tax to relieve, and they simply get no top-up at all.
Compare that with the same person in a relief-at-source scheme, who would still receive the automatic 20% government top-up despite not being a taxpayer. This anomaly disproportionately affects part-time workers and lower earners -- a group that skews female -- and has attracted sustained policy attention, including a low-earner top-up mechanism for those in relief-at-source schemes below the personal allowance.
If you earn close to or below the personal allowance, it is worth checking which relief method your workplace scheme uses, since the difference is a real, permanent 20% gap in the value of your pension contributions.
Claiming Higher-Rate Relief
If your scheme uses relief at source and you pay tax at 40% or 45%, the provider only claims the basic-rate 20% automatically -- the rest is yours to claim.
Self Assessment: report your gross contributions (including the 20% top-up already added); HMRC works the extra relief into your tax calculation, usually via a reduced tax bill or a tax code adjustment.
No Self Assessment: write to, call, or use HMRC's online claim service with your contribution details; HMRC typically adjusts your tax code going forward or issues a repayment.
This claim is not automatic and is easy to overlook -- HMRC does not proactively identify relief-at-source contributions from your payslip alone, so higher earners who never claim can miss out on a meaningful amount of relief every year.
Salary Sacrifice Compared
Salary sacrifice works differently again: you give up part of your salary in exchange for an equivalent employer pension contribution. Because the sacrificed amount is never treated as your salary, you avoid both income tax and National Insurance on it -- a bigger saving than either relief at source or net pay, which only relieve income tax.
Many employers also pass on some or all of the employer National Insurance saving (15% on earnings above the secondary threshold of £5,000 for 2026/27) as an extra pension contribution, further boosting the pot.
Salary sacrifice usually requires your remaining pay to stay above the National Living Wage and can slightly affect income-based benefit entitlement or mortgage affordability assessments, since your official salary figure is reduced. See the salary sacrifice calculator to compare the take-home and pension impact against a standard contribution.
Worked Example: £30,000 Contribution
Take a higher-rate taxpayer aiming for a £30,000 gross pension contribution in 2026/27:
Method
How relief arrives
Net cost to saver
Relief at source
Pay £24,000; 20% (£6,000) auto-added; claim further 20% (£6,000) via Self Assessment
£18,000
Net pay arrangement
£30,000 deducted from gross salary before tax; full 40% relief automatic
£18,000
The end result is identical: £30,000 lands in the pension for an £18,000 net cost either way. The only real difference is whether the higher-rate portion arrives automatically (net pay) or requires an active claim (relief at source) -- and remembering to make that claim is the single most common way higher-rate taxpayers under-claim their pension tax relief.
Frequently Asked Questions
What is pension tax relief?
Pension tax relief is the government's way of giving you back the income tax you would otherwise have paid on money you put into a pension. Because pension contributions are meant to come from pre-tax income, the government tops up (or refunds) the tax you paid on that money, up to your available annual allowance. For a basic-rate taxpayer this effectively means £80 paid into a pension is grossed up to £100. Higher and additional-rate taxpayers are entitled to further relief on top of the basic-rate top-up, though how -- and whether -- they receive it automatically depends entirely on which of the two main relief methods their scheme uses.
What is relief at source?
Under relief at source, your pension contribution is deducted from your take-home pay after tax has already been calculated on your full salary -- so you pay contributions out of net pay. The pension provider then claims basic-rate tax relief (20%) directly from HMRC and adds it to your pension pot automatically, so a £80 contribution from your pay becomes £100 in your pension. Most personal pensions, SIPPs and many workplace schemes use relief at source. The key feature is that the 20% top-up happens automatically regardless of whether you actually pay tax, which is good for non-taxpayers but means higher and additional-rate taxpayers must claim their extra relief separately.
What is a net pay arrangement?
Under a net pay arrangement, your pension contribution is deducted from your salary before income tax is calculated, so you get relief at your full marginal rate immediately, automatically, through payroll -- with no separate claim needed. A basic-rate taxpayer gets 20% relief instantly, a higher-rate taxpayer gets 40% instantly, and an additional-rate taxpayer gets 45% instantly, all baked into the payslip with no further action required. Many large workplace pension schemes, including many defined benefit and some defined contribution trust-based schemes, use net pay arrangements. The trade-off is the opposite of relief at source: it is simple and automatic for higher earners, but disadvantages non-taxpayers, as explained below.
Show 7 more questionsShow fewer questions
Why do low earners lose out under net pay arrangements?
Because a net pay arrangement reduces your taxable pay before tax is worked out, if your income is below the personal allowance (£12,570 for 2026/27) you were never going to pay tax on that portion of income anyway -- so there is no tax to relieve, and you simply lose the 20% top-up that a relief-at-source scheme would have given you automatically. For example, a part-time worker earning £11,000 who contributes to a net pay scheme gets no top-up at all, while an equivalent worker in a relief-at-source scheme would still receive the 20% government top-up despite not being a taxpayer. This is a well-documented anomaly affecting low earners, disproportionately part-time workers and women, and it has been the subject of ongoing government review and a top-up scheme for affected low earners in relief-at-source schemes.
How do I know which method my pension uses?
Check your payslip and your pension scheme's member documentation, or ask your employer or provider directly. A strong clue is your payslip: if your gross pay for tax purposes is reduced by the pension contribution before tax is calculated, you are in a net pay arrangement; if tax is calculated on your full gross pay and the pension deduction comes afterwards from your net pay, you are in relief at source. Many workplace pension providers state the method explicitly in the scheme's welcome pack or annual statement. If you are unsure, your employer's payroll or HR team can confirm which method your specific scheme uses, since some employers offer schemes of both types for different staff groups.
How do higher-rate taxpayers claim extra pension tax relief?
If you are in a relief-at-source scheme and pay tax at 40% or 45%, the pension provider only claims the basic-rate 20% for you automatically -- you must claim the difference yourself. If you complete a Self Assessment tax return, you report your gross pension contributions (the amount actually paid into the pension, including the 20% top-up) and HMRC calculates the additional relief as part of your tax calculation, typically via an adjustment to your tax code or a reduction in tax owed. If you do not complete Self Assessment, you can instead write to or call HMRC, or use the online claim service, providing details of your contributions; HMRC will usually adjust your tax code so the extra relief comes through your salary going forward, or issue a repayment for the current or previous years.
How does salary sacrifice compare to relief at source and net pay?
Salary sacrifice is a different mechanism again: you formally give up part of your salary in exchange for your employer paying an equivalent amount into your pension as an employer contribution. Because the sacrificed amount is never treated as your salary at all, you avoid both income tax and National Insurance on it -- a bigger saving than either relief at source or net pay arrangements alone, which only give income tax relief. Many employers also pass on some or all of the employer National Insurance saving (13.8% or more on earnings above the secondary threshold) as an extra pension contribution. Salary sacrifice usually requires your pay to stay above the National Living Wage and can slightly affect entitlement to income-based benefits and mortgage affordability assessments, since your payslip salary figure is lower.
Does the annual allowance work differently for the two methods?
No -- the pension annual allowance (£60,000 for most people in 2026/27, tapered down to a floor of £10,000 for very high earners with adjusted income above £260,000) applies to the total gross contributions into your pension regardless of which relief method is used. What differs is how contributions are counted and grossed up: relief-at-source contributions are always grossed up by adding the 20% top-up (so a £8,000 net payment counts as £10,000 gross against the allowance), while net pay and salary sacrifice contributions are already the gross, pre-tax amount with no further grossing-up needed. Getting this grossing-up right matters when checking you have not exceeded your annual allowance, particularly if you contribute to more than one scheme using different methods.
Can I switch from net pay to relief at source, or the other way round?
You generally cannot choose the relief method for a specific workplace pension scheme yourself -- it is set by how the scheme is structured by the employer and provider, not selected individually by each member. If you want a different method, your options are typically to ask your employer whether they offer an alternative scheme, to opt out of the workplace scheme and contribute to a personal pension or SIPP instead (which normally uses relief at source), or to raise the low-earner anomaly with your employer if it affects you, since some employers have moved schemes to relief at source specifically to protect low-paid staff. Changing schemes can affect employer contribution matching, so weigh any relief-method advantage against what you might lose in employer contributions.
Worked example: £30,000 contribution across the two methods?
Take a higher-rate taxpayer wanting £30,000 gross into their pension in 2026/27. Under relief at source, they pay in £24,000 net; the provider claims 20% basic-rate relief (£6,000) automatically, taking the pot to £30,000, and the saver then claims the further 20% (another £6,000) through Self Assessment or a tax code adjustment, so their true net cost after all relief is £18,000 for a £30,000 pension contribution. Under a net pay arrangement, the same person simply has £30,000 deducted from gross salary before tax; because that £30,000 would otherwise have been taxed at 40%, their net cost is also £18,000, but the full relief lands automatically with no separate claim needed. The pension outcome is identical -- the only difference is whether the higher-rate portion arrives automatically (net pay) or requires an active claim (relief at source).
Disclaimer: This guide reflects UK pension tax relief rules for 2026/27. Allowances, taper thresholds and claim processes can change. This guide is for general information only and is not professional pensions or tax advice. Consult a qualified financial adviser and refer to gov.uk for current official guidance before making pension contribution decisions.
