Pension Tax Relief: How to Claim Every Pound You're Entitled To

How pension tax relief actually works

When you put money into a pension, you get back the Income Tax you originally paid on it. A £100 contribution from a basic-rate (20%) taxpayer effectively costs £80, because HMRC adds £20 in relief. For a higher-rate (40%) taxpayer it costs £60, and for an additional-rate (45%) taxpayer it costs £55.

The catch: only the first 20% (basic-rate) is automatic. The extra 20% or 25% for higher and additional-rate taxpayers usually has to be claimed back through Self Assessment or by writing to HMRC.

Method 1: Relief at source (most personal pensions and SIPPs)

You pay your contribution from after-tax money. The pension provider claims 20% basic-rate relief from HMRC and adds it to your pot — so a £80 contribution becomes £100.

Higher and additional-rate taxpayers must claim the extra relief separately. If you file a Self Assessment return, declare your pension contributions in the relevant section. If you don't, write to HMRC with the gross contribution figure and your tax code may be adjusted, or you'll get a refund.

Method 2: Net pay (most workplace pensions)

Your contribution comes off your gross salary before Income Tax is calculated, so you get all your tax relief automatically — basic, higher and additional rate. There's nothing to claim.

The downside: low earners under the personal allowance (£12,570) get no Income Tax relief at all under net pay, because they weren't paying tax in the first place. From 2024/25 HMRC pays a top-up of around 20% to put these workers on the same footing as relief-at-source.

Method 3: Salary sacrifice (employer-arranged)

You agree with your employer to give up part of your salary in exchange for an equivalent employer pension contribution. Because the money never appears in your pay, you save Income Tax AND National Insurance — roughly 8% extra for basic-rate taxpayers, 2% extra for higher-rate.

Many employers also pass on some or all of their own NI saving (15% from April 2025) into your pension as an additional contribution, making salary sacrifice the most tax-efficient method for almost everyone with the option.

Annual Allowance, MPAA and tapering

The standard Annual Allowance is £60,000 of total pension contributions per tax year (2025/26), including employer contributions and the gross-up of relief at source. Exceed it and you pay an Annual Allowance Charge at your marginal rate on the excess.

If your taxable income (including pension contributions) exceeds £260,000, the allowance tapers down by £1 for every £2 over, to a minimum of £10,000. If you've already taken taxable income from a flexi-access drawdown pot, the Money Purchase Annual Allowance restricts you to £10,000/year for life.

Frequently asked questions