How is relief given for pension contributions?

Pension contributions benefit from tax relief. However, the amount of the relief is capped at the lower of 100% of earnings (or £3,600 where this is higher) and the available annual allowance.

Annual allowance

The annual allowance is set at£60,000 for 2026/27. However, it is reduced where both adjusted net income exceeds £260,000 and threshold income (broadly income excluding pension contributions) exceeds £200,000, by £1 for every £2 by which adjusted net income exceeds £260,000 until the minimum allowance for the year is reached. This is set at £10,000 for 2026/27.

Once the current year’s allowance has been used up, unused allowances from the previous three years can be used, with an earlier year’s available allowance used before a later year.

Employer contributions

Employer contributions count towards the annual allowance but are not subject to the 100% of earnings cap.

Methods of tax relief

Individuals benefit from tax relief at their marginal rate of tax on pension contributions that they make up to the permitted limits.

There are two methods by which relief may be given – under a net pay arrangement or under a relief at source arrangement.

Relief at source

Under a relief at source arrangement, an employer takes an employee’s pension contribution from their net pay. The amount paid to the pension provider is net of basic rate tax. The pension provider reclaims the basic rate of tax from HMRC. If the employee pays tax at the higher or additional rates, they will need to claim relief for the difference between the rate at which they pay tax and the basic rate in theirSelf-Assessment tax return.

Example

David is a higher rate taxpayer. He pays into a personal pension and his employer deducts pension contributions of£300 a month from his net pay (£3,600 a year).

This is paid net of basic rate tax and equivalent to a gross contribution of £4,500. The pension provider claims an amount equal to the basic rate (£900) from HMRC.

As a higher rate taxpayer, David is entitled to relief at 40%. This is worth £1,800. He has received relief of £900from HMRC. He can claim relief for the remaining £900 in his Self-Assessmenttax return.

The contribution of £4,500 cost him £2,700 (the £3,600 deducted from his pay, less the further relief of £900claimed in his tax return).

Net pay

Under a net pay arrangement, a pension contribution is deducted from a person’s gross pay (before applying PAYE). In this way, relief is given at their marginal rate of tax, and there is no need to claim relief through Self-Assessment. This method is usually used by workplace pensions.

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