You usually pay tax through PAYE if you’re an employee, or directly to HMRC after completing a self-assessment tax return if you’re self-employed. However, by paying into a pension, some of this money is repaid to you, so you will save tax on your contributions, known as tax relief. You can read more in our article How pension tax relief works.
You receive pension tax relief at your marginal rate of tax. If you’re a basic rate taxpayer, you receive 20% tax relief, while higher rate taxpayers can claim 40% tax relief.
If you earn more than £150,000, this makes you an additional rate taxpayer, so you pay a tax rate of 45% on earnings over this threshold. Therefore, you can claim tax relief at an extra 5% on top of the higher rate, giving you a total of 45% tax relief on pension contributions over this threshold.
Where your income falls into several tax bands, the relief given may be at a mixture of rates. The additional tax relief that higher rate taxpayers can claim is particularly beneficial, as it effectively amounts to more than twice the amount of tax relief that basic rate taxpayers receive.
If you are a basic rate taxpayer and want to add £100 to your pension, you only need to pay in £80. The government adds an extra £20 in tax relief on top, which is the amount it would have taken in tax from your salary. Higher rate taxpayers and additional rate taxpayers pay the same £80 at the outset, but then receive higher tax relief. This means that to end up with the same £100 in their pension they only need to contribute £60 or £55 respectively.
For example, let’s say you earned £80,000 in the 2022-23 tax year, and paid £8,000 into your pension after tax. The government repays the 20% basic rate tax taken from your earnings, so the total that’s paid into your pension is £10,000. However, you’re entitled to another 20% tax relief as a higher rate taxpayer (taking the total relief to 40%) – giving you another £2,000 tax relief – and bringing the actual cost of your contribution down to £6,000.
The majority of pension tax relief applied to workplace and personal pensions is applied to contributions after tax (net contributions, as the example uses above). However, if you’re in a salary sacrifice arrangement, when you and your employer agree to reduce your pay in exchange for certain benefits, such as pension contributions, then your pension contributions will be made gross (you can find out more about these below).
The consumer association Which? has a useful pension tax relief calculator which can give you an idea of how much tax relief you’ll get on your pension contributions.