Pension Tax Relief
How pension contributions attract tax relief at your marginal rate, salary sacrifice, annual allowance tapering, and the carry-forward rule.
Pension Tax Relief
Pensions are the most tax-efficient savings vehicle in the UK. Contributions attract Income Tax relief, growth is tax-free, and employer contributions avoid National Insurance. The trade-off is that you cannot access the money until age 55 (rising to 57 from 2028).
How Tax Relief Works
When you contribute to a pension, HMRC adds back the Income Tax you would have paid:
| Your tax band | You pay | HMRC adds | Total in pension | Effective cost per £100 |
|---|---|---|---|---|
| Basic rate (20%) | £80 | £20 | £100 | £80 |
| Higher rate (40%) | £60* | £40 | £100 | £60 |
| Additional rate (45%) | £55* | £45 | £100 | £55 |
Higher and additional-rate taxpayers claim the extra relief (above 20%) through Self Assessment. It is not* automatic.
For salary sacrifice arrangements, your employer reduces your gross salary by the pension contribution amount. This saves both employee and employer National Insurance — making it even more efficient. A higher-rate taxpayer contributing £1,000 via salary sacrifice saves roughly £420 in tax and NIC combined, compared with £400 from a personal contribution.
Annual Allowance (2024-25)
The maximum you can contribute (and receive tax relief on) per year is the Annual Allowance:
| Amount | |
|---|---|
| Standard Annual Allowance | £60,000 |
| Money Purchase Annual Allowance (if you have flexibly accessed a pension) | £10,000 |
Your allowance is capped at your UK relevant earnings — so if you earn £35,000, you can contribute up to £35,000 (not £60,000).
Tapered Annual Allowance
If your adjusted income exceeds £260,000, your Annual Allowance is reduced by £1 for every £2 of income above that threshold, down to a minimum of £10,000.
| Adjusted income | Annual Allowance |
|---|---|
| Up to £260,000 | £60,000 |
| £280,000 | £50,000 |
| £300,000 | £40,000 |
| £320,000 | £30,000 |
| £340,000 | £20,000 |
| £360,000+ | £10,000 |
Carry Forward — Use Unused Allowance
If you did not use your full Annual Allowance in the previous three tax years, you can carry the unused portion forward. This is particularly useful for one-off contributions (e.g. after a bonus or property sale).
Worked Example — Carry Forward
David earned £80,000 in each of the last four years. He contributed £20,000 to his pension in each of 2021-22, 2022-23, and 2023-24. In 2024-25 he receives a £100,000 bonus and wants to make a large pension contribution.
| Tax year | Allowance | Used | Unused |
|---|---|---|---|
| 2021-22 | £40,000 | £20,000 | £20,000 |
| 2022-23 | £40,000 | £20,000 | £20,000 |
| 2023-24 | £60,000 | £20,000 | £40,000 |
| 2024-25 | £60,000 | — | £60,000 |
David can carry forward £20,000 + £20,000 + £40,000 = £80,000 of unused allowance, plus his 2024-25 allowance of £60,000, for a total of £140,000. Provided his earnings support it, he can contribute up to £140,000 this year with full tax relief.
What About the Lifetime Allowance?
The Lifetime Allowance (LTA) was abolished from 6 April 2024. There is no longer a cap on the total value of your pension savings. However, the tax-free lump sum you can take at retirement is now capped at £268,275 (25% of the old £1,073,100 LTA) unless you have LTA protection.
Key Planning Points
- Always claim higher-rate relief. It is not given automatically — you must declare pension contributions on your Self Assessment return.
- Salary sacrifice beats personal contributions where your employer offers it, because it saves NIC for both parties.
- Use carry forward if you have a lumpy income or a windfall year.
- Employer contributions count towards the Annual Allowance but do not count towards your earnings limit.
This is educational content, not financial advice. Pension rules are complex — consider speaking to a regulated financial adviser before making large contributions.
Explain Like I'm 5
A pension is like a treasure chest you fill up now but cannot open until you are much older. The brilliant part is that the government helps you fill it — for every 80p you put in, they top it up to £1. If you earn more money, they add even more. You can put in quite a lot each year, and if you did not use all your allowance last year, you can catch up. The treasure just grows and grows inside the chest without anyone taking any tax from it.
Key Takeaways
- Pension contributions get tax relief at your marginal rate — 20%, 40%, or 45%.
- Salary sacrifice is even more efficient because it also saves National Insurance.
- The Annual Allowance is £60,000, tapered to £10,000 for income above £260,000.
- Carry forward lets you use up to three years of unused allowance — ideal for windfall years.
- The Lifetime Allowance was abolished in April 2024, but the tax-free lump sum is capped at £268,275.
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Try the pension calculatorEducational only - not financial advice