Paying Into a Pension to Reduce Tax: Relief, Bands, and Allowances

Paying into a pension reduces your tax because the government adds tax relief to every pound you put into a registered pension scheme, at whatever rate of income tax you pay. A basic rate taxpayer contributes £80 to get £100 in their pot. A higher rate taxpayer pays £60 for the same £100. At the 45% additional rate, the real cost falls to £55. For 2025/26 you can contribute up to £60,000 a year (or 100% of your earnings, if lower) and still receive relief.¹

How the Relief Reaches Your Pension

Workplace and personal pensions use one of two mechanisms, and which one you’re in decides whether you have to do anything to get the full relief.

Under relief at source, your contribution comes out of pay that has already been taxed. The pension provider then reclaims 20% from HMRC and adds it to your pot. Pay in £80, end up with £100.² If you pay tax at 40% or 45%, the extra relief above 20% is not added automatically. You have to claim it.

Under a net pay arrangement, the employer takes your pension contribution from gross salary before working out income tax. Your taxable pay drops by the full contribution, so you get relief at your top rate immediately with nothing to reclaim.³ Low earners who used to miss out on the 20% top-up under this method now receive it as a direct payment from HMRC, from the 2024/25 tax year onwards.⁴

Check your payslip or ask your provider which method your scheme uses. It changes what you need to do at tax time.

What You Save at Each Income Band

UK income tax bands for 2025/26 are:⁵

Personal allowance: £0 to £12,570 at 0%
Basic rate: £12,571 to £50,270 at 20%
Higher rate: £50,271 to £125,140 at 40%
Additional rate: over £125,140 at 45%

Relief matches your marginal rate. Put £100 into a pension:

At 20%, real cost £80. Saving: £20.
At 40%, real cost £60. Saving: £40.
At 45%, real cost £55. Saving: £45.

Scottish taxpayers have their own bands, including a 21% intermediate rate, a 42% higher rate, and a 48% top rate. Relief follows those rates, so a 42% Scottish taxpayer claims an extra 22% above the basic rate on top of the 20% collected by their provider.²

How Much You Can Put In With Relief

The £60,000 annual allowance is the ceiling on tax-relieved pension saving for 2025/26. It covers everything paid in during the tax year: your own contributions, anything your employer adds, and the basic rate top-up. Employer contributions counting toward the same cap catches people out, particularly those trying to make a large personal top-up on top of a generous workplace scheme.¹

Go over the limit and HMRC applies a charge at your marginal rate, effectively taking back the relief on the excess. There’s no upside to accidental over-contribution.¹

If you didn’t use your full allowance in the three previous tax years, you can carry the unused portion forward and add it to this year’s limit. You have to use the current year’s allowance first, then work through the earliest carried-forward year before moving to more recent ones. You can only carry forward from years in which you were a member of a UK registered pension scheme. Carry forward is factored in automatically when working out whether you’ve breached the allowance, so there’s no separate report to HMRC.⁶

Extra Savings for High Earners

Pension contributions reduce your adjusted net income, which HMRC uses for two of the most punishing means-tested thresholds. This is where the tax saving on a contribution can far exceed the headline 40% relief.

Above £100,000, your personal allowance tapers away by £1 for every £2 of extra income and vanishes at £125,140.⁵ That creates an effective marginal rate of 60% on income between those two figures. A pension contribution large enough to pull adjusted net income back under £100,000 restores the full personal allowance, so the real relief on that contribution is around 60%, not 40%.

The High Income Child Benefit Charge behaves the same way. If either parent earns over £60,000, they repay 1% of their Child Benefit for every £200 above the threshold, with all of it clawed back at £80,000.⁷ A parent earning £65,000 who pays £5,000 into a pension keeps their Child Benefit in full and gets 40% relief on the contribution.

Salary Sacrifice

Salary sacrifice is a variation on the workplace pension: you agree to a lower gross salary, and the employer pays the difference straight into your pension. The pension side works as normal, but because the sacrificed pay never counts as your earnings, both you and your employer save National Insurance on it.⁸ Some employers add their NI saving to your pension contribution as well.

From April 2029 the NI benefit narrows: only the first £2,000 of pension contributions through salary sacrifice each year will be exempt from NI. Anything above that threshold will attract both employer and employee NI in the normal way.⁸

Two Rules That Shrink the Allowance

The £60,000 headline figure isn’t always what you get. Two situations reduce it.

The tapered annual allowance applies once your threshold income exceeds £200,000 and your adjusted income exceeds £260,000. Both tests must be met. The allowance then reduces by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000 at adjusted income of £360,000.⁹ Adjusted income adds employer pension contributions back in, which is where people trip up: they base their contribution planning on salary alone and land an unexpected tax charge.¹

The money purchase annual allowance kicks in the moment you start flexibly drawing from a defined contribution pension beyond the 25% tax-free lump sum. Your annual allowance drops to £10,000 for 2025/26, and you can no longer carry forward unused amounts.¹⁰ If you’re thinking about dipping into your pension while still working and contributing, this is the rule to check first.

Claiming Higher and Additional Rate Relief

Basic rate relief lands in your pot automatically under both scheme types. Relief above 20% is automatic only under net pay. If you’re a 40% or 45% taxpayer in a relief at source scheme, the extra relief only reaches you if you ask for it.²

The usual route is Self Assessment. In your online return, enter your total gross pension contributions (what you paid plus the 20% basic rate top-up your provider already added) in the section for registered pension scheme contributions.¹¹ HMRC works out the extra relief and either refunds you or adjusts your tax code. Your P60 and pension provider statements are the documents you’ll need.

If you don’t file a return, contact HMRC directly by post or phone. HMRC will normally give you the relief by changing your tax code so less tax is taken from your pay over the following months. Where a refund is due instead, it’s paid to your bank account.¹²

HMRC won’t remind you. If you’ve been paying into a pension for years at 40% or 45% and never claimed the difference, you can amend returns going back four tax years to collect what’s owed. Easier still is to claim each year as it happens.

1
GOV.UK. Tax on Your Private Pension Contributions – Annual Allowance
2
GOV.UK. Tax on Your Private Pension Contributions – Tax Relief
3
HM Revenue & Customs. Pensions Tax Manual – Contributions: Tax Relief for Members: Methods: Net Pay
4
GOV.UK. Low Earners Anomaly: Pensions Relief Relating to Net Pay Arrangements
5
GOV.UK. Income Tax Rates and Personal Allowances
6
GOV.UK. Check if You Have Unused Annual Allowances on Your Pension Savings
7
GOV.UK. High Income Child Benefit Charge: Overview
8
GOV.UK. Changes to Salary Sacrifice for Pensions from April 2029
9
GOV.UK. Work Out Your Reduced (Tapered) Annual Allowance
10
GOV.UK. Pension Schemes Rates
11
GOV.UK. File Your Self Assessment Tax Return Online
12
GOV.UK. Self Assessment Tax Returns – Claiming a Tax Refund