A Guide to Tax Relief

Pensions are a tax-efficient way to save for your retirement – when you pay into your pension, there is a top-up payment called tax relief that the government will normally add to your pension. Are you maximising the tax relief that is available to you?

In this article, our expert team of independent financial advisers at PIL Southampton talks you through everything you need to know about how tax relief can give you a welcome boost to your pension contributions.

What is tax relief on pension contributions?

Unlike the salary you receive from your employer, the money you receive from your employer that goes straight into your pension is not liable for Income Tax or National Insurance. This means that the whole amount is yours, without any deductions.

Tax relief on your employer’s contributions

For example, if your employer contributes 5% of your £2,500 monthly earnings into your pension, the full £125 will be added to your pension.

Tax relief on your own contributions

Although tax relief can also apply to the contributions you, yourself, make into your pension, you may need to claim part, or all, of this amount directly from HMRC (HM Revenue & Customs). 

Whether this is the case will depend on what type of pension it is and whether you are still a current employee of the company whose pension plan it is. 

If you still work for the company, you might be able to establish whether it is a ‘net pay’ or a ‘relief at source’ pension plan through details on your pay slip, or you will be able to find out from your company’s HR department.

If you no longer work for the company, the pension plan may still allow you to make one-off contributions into the pension, in which case the way you receive tax relief may differ. Either way, it is still important to know whether the plan is ‘net pay’ or ‘relief at source’. 

If net pay is used

Regular pension contributions are deducted from your salary before any tax deductions, meaning that you automatically receive all the tax relief you are entitled to and don’t need to liaise directly with HMRC for any further claim. 

However, it is important to note that, if you make any extra one-off pension contributions, you will need to claim your tax relief back from HMRC once you have deposited the extra funds, by contacting them yourself. They will then either pay you directly or adjust your tax code so that the tax you pay through the year is reduced accordingly.

If relief at source is used

For this kind of pension plan, your whole salary is taxed as normal and your pension contribution is then taken from your ‘take home’ pay. In this situation, your pension provider will automatically top up that pension contribution by 20% and then claim it back from HMRC. For example, if your monthly salary is £2,500 and your pension contribution is 5%, your pension provider will take £100 (4%) from your ‘take home’ pay, then add £25 (1%) to your pension pot which they will claim back from HMRC.

If you pay more than the basic 20% Income Tax rate, you can claim your extra tax relief back from HMRC, which they will either pay you direct or adjust your tax code to reduce the total annual amount of tax you are liable for.

How much tax relief can I get?

The amount you can save in your pension tax-free is limited each tax year. This is your ‘annual allowance’. In the current 2025/26 tax year, an individual’s amount is capped at £60,000 or 100% of your annual salary (or £3,600 if you earn anything between zero and £3,600).

Note: Any defined benefit pension scheme – also referred to as a final salary or salary-related scheme – that you have previously belonged to, or still do, will also count towards your annual allowance if contributions have been made in that tax year, so you should contact them to confirm these exact figures.

How to claim pension tax relief

Usually, you won’t need to claim it at all, as your pension provider or employer will automatically apply the appropriate tax relief on your behalf. However, if you pay Income Tax at a higher rate than the basic 20%, or you don’t earn enough to pay Income Tax at all, or if you’re still paying into an old retirement annuity contract, you will probably have to claim the tax relief yourself.

Check how your tax relief is claimed

As mentioned earlier in this article, tax relief can be claimed either through ‘relief at source’, where your pension provider claims 20% tax relief back from the government on your behalf, or through ‘net pay’, where your pension contributions are taken from your salary before Income Tax and National Insurance deductions which means that you are taxed on a lower amount.

Personal Pensions are ‘relief at source’. For a workplace pension, you will need to check with your employer which method they use.

Get all the tax relief you’re eligible for

For relief at source pensions, your pension provider will claim back the Income Tax you have already paid, at a fixed 20% rate for everyone. Anyone paying more than 20% Income Tax will need to claim their extra tax relief by contacting HMRC direct or by completing a Self-Assessment tax return.

You can usually backdate a tax relief claim for the previous three tax years, so do make sure you have claimed the full amount you are entitled to.

If your pension is a net pay arrangement, you will automatically be getting the correct amount of tax relief. However, if you are below the tax paying threshold, you don’t benefit from tax relief on your pension contributions as there is no tax bill to reduce. In this instance, HMRC should send you a top-up payment when the new tax year starts each April. This amount will equate to the amount of tax relief you would have been entitled to for the previous tax year. For tax purposes, this amount is paid directly to you as income, not straight into your pension. 

How the annual allowance works

Tax relief on pension contributions only applies to those made up until the age of 75. The amount of tax relief you are entitled to is referred to as your annual allowance.

This article Annual Allowance for Pensions delves into all the details about how the annual allowance works.

Pension tax relief works differently for salary sacrifice

Contributing to your pension via a salary sacrifice arrangement with your company means that your salary is reduced by the amount that your company pays into your pension fund as your employee contribution, in addition to their employer contribution. 

The advantage of making your pension contributions this way is that, by reducing your salary, you are also reducing the amount of National Insurance that you will have to pay.

There is no extra admin involved for you either, as your salary is adjusted accordingly and your employer pays the whole amount of pension contribution directly into your pension fund. 

However, the downside to your salary being lower is that it will reduce the amount you can borrow when you are taking out a mortgage or other credit.

Pension tax relief if you run a limited company

When you run a limited company, you will usually have the choice of whether you would like to pay into your pension as employer contributions from your company or, alternatively, as employee contributions from your salary.

If you choose employee contributions, for them to qualify for tax relief you will need to make sure that the amount you pay in is no more than your annual allowance, including any employer contributions, and that it doesn’t exceed your earnings during that tax year. Note that dividends are not counted as earnings. 

Employer contributions can be deducted as a business expense

Although employer contributions are not eligible for tax relief, you can usually deduct them as a business expense in order to reduce the amount of corporation tax you are liable for.

However, you can only deduct employer contributions as a business expense if they are ‘wholly and exclusively’ for business purposes – for example, that the amounts used for employees doing similar jobs are consistent, and the pension contributions are lower than your company’s annual profits.

How PIL Southampton can help you 

We have a team of qualified, independent and highly experienced financial advisers ready to guide you through your pension arrangements. They will take the time to get to know you and your individual circumstances and do their best to help you to run your financial affairs, including your pension arrangements, as tax efficiently as possible.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.