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How relief works
- Basic rate relief. On a personal pension, 20% is usually added to your contribution automatically, so £80 becomes £100 in the pension.
- Higher rate relief. Higher rate taxpayers claim a further 20% through Self Assessment, and additional rate taxpayers a further 25%.
- The annual allowance. Most people can contribute up to £60,000 a year with relief, including employer contributions, or their earnings if lower.
- Carry forward. Unused allowance from the previous 3 years can sometimes be used to contribute more.
The high earner traps
Very high earners have a tapered annual allowance, reducing how much they can contribute with relief. Anyone who has flexibly accessed a pension may be limited by the money purchase annual allowance. And higher rate relief is only received if you actually claim it, which many people forget to do.
The two ways relief is given, and why your payslip differs
Relief at source. You pay from taxed income and the scheme reclaims basic rate from HMRC. Put in £80 and £100 lands in your pension. If you pay higher or additional rate, the extra relief is not automatic, you claim it through your tax return or by contacting HMRC. Most personal pensions and many workplace schemes work this way.
Net pay arrangement. Your employer takes the full gross contribution before calculating PAYE, so you get relief at your full marginal rate immediately and there is nothing to reclaim. Used by occupational schemes.
Two consequences. Higher rate taxpayers in relief at source schemes who never claim are leaving 20% on the table, often for years. Non taxpayers in net pay schemes get no relief at all, whereas in a relief at source scheme they would still get the 20% top up on contributions up to £2,880 net a year.
Scottish taxpayers on the 19% starter rate still receive 20% under relief at source and do not repay the difference.
The annual allowance
The annual allowance is £60,000. That covers everything going in: your contributions, tax relief, and anything your employer pays.
Separately, tax relief on your own contributions is limited to 100% of your relevant UK earnings, or £3,600 gross if that is higher. So someone earning £30,000 cannot get relief on a £50,000 personal contribution, even though the annual allowance would allow it. Employer contributions are not restricted by your earnings.
Carry forward, which is more useful than people realise
You can carry forward unused annual allowance from the previous 3 tax years, using the oldest first. You must have been a member of a UK registered pension scheme in each year you are carrying forward from, though you need not have contributed.
Used properly this allows a large one off contribution in a good year, which is particularly useful for company owners taking an unusual profit or anyone with lumpy income. The earnings limit above still applies to personal contributions, which is why employer contributions from a company are often the better route.
The taper, and the two tests that trigger it
High earners can see the £60,000 cut back, but both of these have to be breached:
- Threshold income over £200,000
- Adjusted income over £260,000
If both apply, the allowance falls by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000, which is reached at adjusted income of £360,000.
The reason both tests matter is that threshold income broadly excludes pension contributions while adjusted income includes them. Someone on £210,000 with large employer contributions can be caught. Someone on £250,000 with none may not be.
The trap that catches people who have started drawing
Take taxable money flexibly from a defined contribution pension and the money purchase annual allowance is triggered, cutting what you can put in to £10,000 a year. It cannot be carried forward, and it cannot be undone.
This catches people who take a small flexible payment while still working, not realising it permanently reduces what they can contribute afterwards. Taking only the tax free lump sum does not trigger it.
Why contributions do more than they look
A pension contribution extends your basic rate band, which is why the effect can be much larger than the headline relief in two specific places.
Between £100,000 and £125,140 the personal allowance is withdrawn at £1 for every £2, giving an effective marginal rate of 60%. A contribution that brings adjusted net income back under £100,000 recovers the allowance, so the effective relief is around 60%.
Company owners have a further point. Employer pension contributions are generally deductible against Corporation Tax and carry no National Insurance, which makes them one of the more efficient ways of extracting value, particularly now dividend rates have risen.
What to check this year
Whether your scheme is relief at source or net pay. If it is relief at source and you pay higher rate, whether you have ever claimed the extra. Whether you have unused allowance from the last three years. And, if your income is near £100,000 or £200,000, whether a contribution moves you out of a band where the effective rate is punishing.
Claiming all your pension relief?
Higher rate taxpayers routinely leave relief unclaimed, sometimes for years. TaxTune checks your contributions, claims the full relief, and can often reclaim relief you missed in earlier years.
Let us claim your full relief
We make sure you receive relief at your correct rate, use your allowances, and reclaim anything missed. Fixed fee, and often more than pays for itself.
Frequently asked questions
How does pension tax relief work?
You get relief at your highest rate of tax. Basic rate relief of 20% is usually added automatically, while higher and additional rate taxpayers claim the extra through their tax return.
What is the pension annual allowance?
Most people can contribute up to £60,000 a year with tax relief, including employer contributions, or up to their earnings if lower. Unused allowance from the previous 3 years can sometimes be carried forward.
How do I claim higher rate pension relief?
Through your Self Assessment return, by entering your personal pension contributions. Higher rate taxpayers receive a further 20% and additional rate taxpayers a further 25%.
What is the money purchase annual allowance?
If you have flexibly accessed a pension, your allowance for further contributions with relief is reduced, currently to £10,000 a year.
Can I reclaim relief I missed in past years?
Often yes. You can usually go back several years to claim higher rate relief you did not claim at the time, which can produce a worthwhile refund.