Pension tax relief is one of the most powerful tax benefits available in the UK. When you contribute to a pension, the government effectively gives back the income tax you paid on that money.
How it works: if you contribute £80 to a pension, your pension provider claims £20 back from HMRC (basic rate relief at 20%). This means £100 goes into your pension, but it only cost you £80. This happens automatically for most workplace and personal pensions using relief at source.
If you are a higher rate taxpayer (40%), you can claim an additional 20% relief through your Self Assessment tax return. So a £100 pension contribution only costs you £60 after full relief — a 40% discount.
Additional rate taxpayers (45%) can claim 25% additional relief, making the true cost just £55 for £100 in the pension.
There are two methods of pension tax relief. Relief at source means contributions are taken from your net pay and the provider claims 20% from HMRC. You claim any extra relief yourself. Net pay arrangement means contributions are taken before tax is calculated, so you get full relief automatically through your payroll. This is common with salary sacrifice.
The key difference: with relief at source, lower earners who do not pay tax still get 20% relief on contributions up to £2,880 per year (getting £3,600 in their pension). With net pay, you only get relief if you actually pay tax.
Salary sacrifice is the most tax-efficient method because it also saves National Insurance for both you and your employer. On a £50,000 salary with 5% salary sacrifice, you save approximately £900 per year compared to making the same contribution through relief at source.
Use our pension calculator to project your pot and our salary sacrifice calculator to see the tax savings.