Pensions Basics (UK)
How UK pensions work — workplace pensions, SIPPs, auto-enrolment, tax relief at different rates, and the key allowances you need to know.
Pensions Basics (UK)
A pension is a long-term savings plan specifically for retirement. The UK government incentivises pension saving through tax relief, making pensions one of the most tax-efficient ways to build wealth.
How Tax Relief Works
When you contribute to a pension, the government adds back the tax you paid on that money:
| Tax Band | Your contribution | Tax relief added | Total in pension |
|---|---|---|---|
| Basic rate (20%) | £80 | £20 | £100 |
| Higher rate (40%) | £60 | £40 | £100 |
| Additional rate (45%) | £55 | £45 | £100 |
Basic-rate relief is added automatically by the pension provider. Higher and additional-rate taxpayers must claim the extra relief through Self Assessment.
This means every £100 in your pension only costs a higher-rate taxpayer £60 out of pocket — an immediate 67% return before any investment growth.
Workplace Pensions & Auto-Enrolment
Since 2012, employers must automatically enrol eligible employees into a workplace pension. The minimum contributions are:
| Who pays | Minimum % of qualifying earnings |
|---|---|
| Employee | 5% (includes 1% tax relief) |
| Employer | 3% |
| Total | 8% |
"Qualifying earnings" are earnings between £6,240 and £50,270 per year (2025–26 thresholds). You can opt out, but you would lose the employer contribution — which is essentially free money.
SIPPs (Self-Invested Personal Pensions)
A SIPP is a pension you control yourself. You choose the investments — funds, shares, ETFs, bonds, even commercial property. SIPPs are popular with self-employed people and those wanting more control than a workplace pension offers.
Key features:
- Same tax relief as any other pension
- Wider investment choices
- Often lower fees than workplace pensions for larger pots
- Can be held alongside a workplace pension
Annual Allowance
The annual allowance is the most you can contribute to pensions in a tax year while still receiving tax relief. It is currently £60,000 (or 100% of your earnings if lower).
If you exceed the annual allowance, you face an annual allowance charge — essentially paying back the tax relief on the excess.
Carry Forward
If you did not use your full annual allowance in the previous three tax years, you can carry forward the unused amounts. This lets you make larger contributions in a single year without triggering a tax charge.
To use carry forward, you must have been a member of a registered pension scheme in the years you are carrying forward from.
The Lifetime Picture
You can access your pension from age 55 (rising to 57 from April 2028). At that point you can typically take 25% as a tax-free lump sum and the rest is taxed as income.
State Pension
The new State Pension (for those reaching State Pension age after 6 April 2016) pays up to £221.20 per week (2025–26 rate). You need 35 qualifying years of National Insurance contributions for the full amount and at least 10 years for any State Pension at all.
Check your State Pension forecast on the GOV.UK website.
Common Pension Mistakes
- Opting out of auto-enrolment — you lose the employer match
- Not claiming higher-rate relief — higher-rate taxpayers must claim via Self Assessment
- Ignoring fees — a 1.5% annual fee versus 0.3% can cost tens of thousands over a career
- Not consolidating old pensions — lost track of pensions from previous employers? The Pension Tracing Service can help
- Assuming the State Pension is enough — at ~£11,500/year, it covers only basic living costs
Explain Like I'm 5
A pension is like a jar of sweets you are not allowed to open until you are much older. The really nice thing is that every time you put one sweet in, a kind grown-up puts extra sweets in for you too. Your boss at work even adds some of their own sweets to your jar. When you are old enough, you get to enjoy them all!
Key Takeaways
- Pension contributions get tax relief: it costs a basic-rate taxpayer only £80 to put £100 into a pension, and a higher-rate taxpayer just £60.
- Auto-enrolment means your employer must contribute at least 3% — do not opt out unless you truly cannot afford it.
- The annual allowance is £60,000. Unused allowance from the last three years can be carried forward.
- Check your State Pension forecast on GOV.UK — 35 qualifying years of NI are needed for the full amount.
Monitor your pension contributions and annual allowance usage with CoreFi.
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