How does pension tax relief work?
When you contribute to a pension, the government adds tax relief at your marginal rate. For basic rate taxpayers, the provider automatically claims 20% from HMRC. Higher rate taxpayers pay the same as basic rate contributors upfront but can claim an additional 20% through self-assessment, reducing their net cost to 60p per £1 in pension.
What is salary sacrifice?
Salary sacrifice is an arrangement where your employer reduces your gross salary by the pension contribution amount before calculating tax and National Insurance. This means you save both income tax and employee National Insurance on the contribution, making it more tax-efficient than relief at source for most employees.
What is the annual allowance?
The annual allowance is the maximum you can contribute to pensions in a tax year while still receiving tax relief. In 2025/26 it is £60,000 or 100% of your earnings, whichever is lower. Contributions above this limit may be subject to an annual allowance charge. The allowance includes both your contributions and your employer's.