How pension tax relief works

Tax relief is designed to encourage you to put money aside for your retirement and is one of the benefits of saving through a pension. Your own personal circumstances will influence if you're eligible to invest in a pension, and the amount of tax relief you'll receive. 

When you get tax relief, at least some of the money that would otherwise have gone to the government as tax goes into your pension account instead. This doesn’t mean you won’t have to pay tax on that money in the future, simply that you don’t have to pay income tax on it now. Remember, all tax rules may change in the future and currently you can't usually access the money invested in your pension until you are 55 (due to change to 57 in 2028).

Tax relief on your employer’s contributions

Usually, you would have to pay Income Tax on money you receive from your employer. But if the money is going into your pension as an employer pension contribution, no tax or national insurance is deducted from your employers' contributions. So, you receive full tax relief on any contributions your employer makes to your pension. 

• For example, if you earn £2,000 a month and your employer’s contributions to your pension are 5%, the full £100 will go straight into your pension, no matter how much tax you would usually have to pay on it.

Tax relief on your own contributions

You can also receive relief tax relief on any money that you pay into your pension yourself, but you may have to claim some or all of it from HM Revenue & Customs (HMRC). The way your tax relief is handled will depend on the type of pension you have, and whether you still work for the company whose plan it is:

• Net pay – your pension contributions are taken from your salary after National Insurance is deducted but before income tax is deducted. This means you only pay National Insurance on the contribution and no income tax needs to be claimed back from HMRC.
• Relief at source – your pension contributions are taken from your salary after both National Insurance and income tax are deducted. This means you pay both National Insurance and income tax on the contribution, tax relief is then applied by the scheme claiming 20% income tax from HMRC, if you have paid tax at a higher rate than 20% you will need to claim that additional tax back yourself and it is repaid outside of the pension scheme.
• Salary Sacrifice - you agree to waive part of your salary in exchange for your employer making contributions to your pension. This means you do not pay National Insurance or income tax on the contributions.

You can find out what kind of arrangement your plan has in your Contribution Explained document, which can be found under Plan information in PlanViewer.

Single top ups

If you no longer work for the company that runs the plan, you may still be able to make one-off contributions to your pension. In this case, the way you receive tax relief may be different.

If your plan provides relief at source, your salary will be taxed in the normal way and your pension contribution will come out of your ‘take home’ pay. We will automatically top up your pension contribution by 20% when we invest your monies. We’ll then claim 20% tax relief for you from HMRC. 

• For example, if your salary is £2,000 a month and your pension contributions are 5%, you will pay £100 a month into your pension. To achieve this, we take £80 from your ‘take-home’ pay, top up your contribution for you by £20 and then claim £20 back from HMRC.

If you pay Income Tax at a higher rate than 20%, you can claim extra relief directly from HMRC. They will either send it directly to you or adjust your tax code to reduce the total amount of tax you pay over the year.  

If you are a non-tax payer or live in Scotland and pay income tax at a rate of 19%, you will still benefit from a 20% top-up on your contributions from the government. 

The process is similar if you decide to make an extra one-off contribution into your pension, separately from your salary. Call us on 0800 3 68 68 68 to make the payment. We will then claim 20% tax relief from HMRC and you can notify them of any extra relief you are due.

Remember that whether you benefit from tax relief will depend on what your total income is and how much tax you usually have to pay.

Tax treatment depends on individual circumstances and all tax and pension rules may change in the future.