Tax and your pensions

This is where your contribution is deducted from your gross salary before tax is calculated, allowing you to receive tax relief at your highest rate immediately. This means your contributions are not subject to income tax.

However, National Insurance contributions (NICs) must be assessed on your gross earnings before deduction of any pension contributions, meaning there is no NICs relief.

If you earn less than the Personal Allowance and don’t pay tax, you will not get tax relief if your pension uses net pay.

This is where your pension provider claims basic rate tax from HRMC, which is then paid into your pension after the pension contribution was made.

You can get tax relief up to the higher of £3,600 and 100% of earnings. Currently the basic rate in England, Northern Ireland, Wales and Scotland is 20%. Your pension provider claims this 20% tax relief from HMRC.

For example, if you pay £80 net, your pension provider will claim the extra £20 from HMRC making a total contribution of £100.

If you pay tax at a higher rate, you will be able to reclaim any additional tax relief from HMRC via your self-assessment tax return. If you earn less than the Personal Allowance and don’t pay tax, you will still get tax relief if your pension uses relief at source.

If you have a retirement annuity contract that was set up before 1 July 1988, you will normally pay gross contributions to your pension. Your pension provider doesn’t normally claim and add any tax relief to your pension pot, meaning you need to claim any tax relief you’re due – both basic rate and any higher rate relief – from HMRC.

Also called salary sacrifice, this is an arrangement an employer can set up to benefit their employees.

Salary exchange is a contractual agreement between an employer and employee where the employee agrees to have their gross salary reduced by a certain amount. The employer then pays this amount into the employee’s pension as an employer pension contribution.

Because the salary is being exchanged rather than paid directly, neither you nor your employer will pay National Insurance Contributions on the amount exchanged. So you will save money, which you can then choose to reinvest into your pension, or slightly increase your take home pay.

Your employer also chooses how to use the National Insurance savings they make – some employers offer to pay it into your pension or invest in other employee benefits for example.

The annual allowance is the total amount you can save into all your pensions each year, before a tax charge applies.

• For the 2025/2026 tax year, the annual allowance is £60,000.
• Both you and your employer contributions count towards the annual allowance.
• You can choose to pay in more than the £60,000 allowance, however any contributions above this amount will be subject to a tax charge.
• Any unused annual allowance can be carried forward for up to 3 years, as long as you were in a UK pension scheme for those 3 years.

This applies if an individual has 'threshold income' over £200,000 and also 'adjusted income' over £260,000 (2025/2026 tax year).

• Threshold income is total taxable income from all sources, plus the amount of any new salary sacrifice set up after 8 July 2015, minus the gross amount of any member contributions to relief at source pensions.
• Adjusted income is total taxable income plus gross member contributions to net pay pension schemes plus employer pension contributions.
• If an individual has threshold income over £200,000 and adjusted income over £260,000, they lose £1 of annual allowance for every £2 of adjusted income above £260,000. The minimum tapered annual allowance is £10,000. (2025/2026 tax year.)

This is the total amount of tax-free lump sums that can be paid from all your pension plans. This is currently set at £268,275, but may be higher if you’ve applied to HMRC for certain protections.

If you have flexibly accessed a pension, the lower Money Purchase Annual Allowance of £10,000 (2025/2026 tax year) applies.

This includes:

• Taking a taxable income from flexi-access drawdown. If you take tax free cash and have not taken an income yet from flexi-access drawdown this will not apply until you do take a taxable income.
• Taking more than the Government Actuary Department’s maximum if you are in capped drawdown.
• Taking an Uncrystallised Funds Pension Lump Sum (UFPLS).

Purchasing an annuity or taking all of a pension as a Small Pot lump sum of up to £10,000 does not trigger the MPAA.

This is the total amount of tax-free lump sums that can be paid from all your pension plans, including death and certain other lump sum payments (such as for serious ill-health). The limit is currently set at £1,073,100, but may be higher if you have applied to HMRC for certain protections.