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If you don’t quite get pension tax relief, you’re not alone, but it pays to make the most of it.
The government encourages pension saving by giving tax incentives, making tax relief one of the major benefits of saving into a pension. But there's also something called annual allowance. This is different from tax relief, but it's also important to know about.
How does pension tax relief work?
You can essentially contribute £100 into your pension and it only costs £80. This means when you pay into your pension from your pay packet or make a one-off contribution, you’ll get a boost from the government in the form of tax relief.
Any contributions paid into your plan will benefit from an additional 20% in the form of tax relief.
For example:
| You pay | Tax relief added as a boost to your contribution | Total contribution added to your pension plan |
|---|---|---|
| £80 | £20 | £100 |
| £160 | £40 | £200 |
| £240 | £60 | £300 |
Higher or additional rate taxpayers
If you pay income tax at a rate higher than the basic rate of tax, you could benefit from additional tax relief. If you’re in a workplace scheme and your employer takes your pension contribution before you pay tax, then you won’t need to do anything. But if you pay into an individual pension or a workplace pension and your contribution is taken after tax has been paid then you’ll need to claim the difference between basic-rate tax and the amount of tax you pay from HM Revenue & Customs (HMRC).
The amount of tax relief you get depends on the amount of income tax you pay. The rates of tax are different depending on where you live in the UK. Tax relief also depends on your individual circumstances.
Limits on pension tax relief and contributions
There’s no limit on how much you can save into your pensions each tax year. But there are limits on how much tax relief will apply.
This is 100% of your earnings on contributions you make. So if you earn £20,000, then your limit would be £20,000. If you don’t have any earnings the most you can pay into a pension is £2,880. Then tax relief is added to make a total of £3,600. Anyone can have a pension, even a child.
Pension annual allowance
There's a limit to how much you can pay into your pension every year without a tax charge applying. This is called the annual allowance. For the 2024/25 tax year it’s £60,000, although if you have used up this year's annual allowance, any unused annual allowance from the three tax years before this tax year can be carried forward to the present tax year to boost the amount of annual allowance available. But if you're an employee then you would still need to have the earnings to make a large contribution. For example, to pay in £60,000 you would need to be earning £60,000.
If you're a very high earner then there's also something called the tapered annual allowance. You can find out more about this in our pensions and tax - know your limits article.
Don’t miss out on the benefits of saving into a pension
If you’re getting close to the annual allowance it could be tempting to stop paying into your pension to avoid a tax charge. However, this might not always be the best thing to do. You could miss out on many benefits by stopping your pension contributions. This includes employer contributions that could really boost your income in retirement.
Avoiding this charge shouldn’t necessarily be your default position. You should think carefully about whether stopping contributions to avoid the charge or staying in the scheme and paying the charge will leave you better off in the long term. We recommend you speak to a financial adviser for further guidance.
People in danger of going over their annual allowance may worry about having enough money to pay the tax charge. However, there are instances where the scheme will pay the charge for you and then the charge is deducted from your pension.
Paying an annual charge is not a bad thing. It’s not a punishment or a sign that you’ve done something unlawful. It’s just a way for HMRC to claw back tax relief.
Seeking financial advice
It’s a good idea to speak to an independent financial adviser if you’re in this situation before making a decision. They’ll go through your individual circumstances and advise you of the best way to proceed. Advisers may charge for their services – but they should agree any fees with you up front.
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