How pension tax relief works
When you pay into a pension, the government effectively refunds the Income Tax you would otherwise have paid on that money. For a basic-rate taxpayer, a £80 contribution is automatically topped up to £100 in the pension. Higher-rate taxpayers can claim further relief (bringing the effective cost of that same £100 down further) via Self-Assessment or by contacting HMRC, and additional-rate taxpayers can claim even more.
| Tax rate | Cost of a £100 pension contribution |
|---|---|
| Basic rate (20%) | £80 |
| Higher rate (40%) | £60 (after claiming the extra relief) |
| Additional rate (45%) | £55 (after claiming the extra relief) |
The annual allowance
There's a limit on how much can go into your pensions each year while still getting tax relief — the annual allowance, currently £60,000 (or 100% of your earnings if lower). This covers your own contributions, your employer's, and any tax relief added together. High earners with total income (including pension contributions) above a certain threshold can see this allowance gradually reduced under the "tapered annual allowance" rules.
Carrying forward unused allowance
If you haven't used your full annual allowance in the previous three tax years, you may be able to "carry forward" the unused amount and add it to this year's allowance — useful if you've had a particularly high-income year, received a bonus, or sold a business and want to shelter more in your pension at once. This requires having been a member of a registered pension scheme in each of those earlier years.
Exceeding the allowance
Contribute more than your available allowance (including any carried forward) and you'll face an annual allowance charge, effectively clawing back the excess tax relief — so it's worth checking your total contributions across all your pensions, especially if you have more than one, before making a large one-off payment.
Key takeaways
- Pension contributions get tax relief at your marginal rate, though higher earners must claim part of it separately.
- The annual allowance is currently £60,000, covering your contributions, your employer's, and tax relief combined.
- Unused allowance from the previous three years can sometimes be carried forward.
- High earners may have a reduced ("tapered") annual allowance.