Pension Tax Relief Explained: What the Government Actually Adds to Your Pot

Every pound you put into a pension comes with government money attached. For a basic-rate taxpayer, a £100 contribution costs you £80. The pension provider claims the other £20 from HMRC automatically under relief-at-source, and it lands in your pot. Higher-rate taxpayers get back a further 20% through Self Assessment, additional-rate taxpayers a further 25%.

The Annual Allowance for 2024-25 is £60,000, or 100% of your earnings, whichever is lower. Stay within that and you pay no tax on the contributions. Breach it and the excess is taxed as income, which wipes out the relief you were trying to get.

The main trap people hit is assuming the £60,000 is always the limit. For high earners, the tapered annual allowance cuts it. If your adjusted income (broadly, total income including employer pension contributions) exceeds £260,000, your annual allowance reduces by £1 for every £2 over that threshold, down to a minimum of £10,000. This catches people who receive large employer contributions without realising those count toward the limit.

If you have not used your full allowance in the previous three tax years, you can carry the unused amounts forward and contribute more than £60,000 in a single year. The potential combined figure can exceed £200,000, which matters if you have had a high-earning year or want to make a lump sum contribution before a business sale. You must have been a member of a registered pension scheme in each of those three years to use carry forward.

The Lifetime Allowance was abolished in April 2024, so there is no longer a cap on how much you can hold in a pension over your lifetime. The tax-free lump sum you can take remains capped at £268,275 (25% of the old £1,073,100 LTA) unless you hold transitional protection from before the abolition.

Most people under the income threshold should use their annual allowance as fully as their cashflow allows, starting with a workplace pension to capture any employer matching, then a SIPP if capacity remains. A higher-rate taxpayer gets a 40p return for every 60p they contribute.