Your pension allowance and tax relief explained
Tax relief is income tax that the government pays back to you and it can really boost your pension savings. We explain how it works.
When you pay into a pension, you can get tax relief from the government which can significantly boost your retirement savings. This tax relief is one of the best things about saving into a pension.
However, there are limits to how much you can pay into a pension and still get tax relief. The rules can seem complex, but understanding them can help you make the most of your pension savings.
How is pension tax relief applied?
Tax relief on your pension contributions can be applied in two ways: ‘relief at source’ and ‘net pay’.
Relief at source
Relief at source is used by some workplace pension schemes as well as self-invested personal pensions (SIPPs) like the one Vanguard offers.
Your pension contribution is made from income that you’ve already paid tax on. Your pension provider then claims the tax back from the government at the basic rate of 20% and adds it to your pension. So, for every £80 you pay in, you get £20 in tax relief on top.
If you are a higher-rate (40%) or additional-rate (45%) taxpayer1, you can claim extra tax relief through your self-assessment tax return or via HMRC’s online service.
The table below shows how it works.
How tax relief works under relief at source
Income tax rate |
You pay |
Added to pension |
Additional amount you can claim |
Effective cost of a £100 contribution |
Basic rate (20%) |
£80 |
£20 |
£0 |
£80 |
Higher rate (40%) |
£80 |
£20 |
£20 |
£60 |
Additional rate (45%) |
£80 |
£20 |
£25 |
£55 |
Source: Vanguard calculations
Net pay
Net pay is used by some workplace pension schemes. Your pension contributions are deducted from your salary before tax is applied. This means you automatically receive tax relief at your highest rate of income tax.
So, if you’re a higher-rate or additional-rate taxpayer, you get the full 40% or 45% tax relief on earnings without needing to claim it separately.
How much can you contribute and receive tax relief on?
While tax relief can boost your pension contributions, there are limits to how much you can pay in and still receive it. These limits depend on things like your earnings and whether you've already started taking money from your pension.
Annual allowance
Most people can pay up to 100% of their gross (pre-tax) relevant earnings2 into their pension each tax year, up to a maximum of £60,000. This is known as your annual allowance.
Here’s how it works:
- If you earn £50,000, you can usually receive tax relief on pension contributions up to £50,000. For example, you could pay in £32,000 and the government would add £8,000 in basic-rate tax relief, taking the total contribution to £40,000.
- If you earn £80,000, you could pay in £48,000, which would be boosted to £60,000 with £12,000 basic-rate tax relief. You may also be able to claim additional higher-rate tax relief depending on your income.
The annual allowance covers all your pensions (excluding the State Pension) and includes employer and third-party contributions, as well as your own personal contributions.
If you exceed your annual allowance, you may have to pay a tax charge on the excess.
Tapered annual allowance
For very high earners, the annual allowance is gradually reduced (‘tapered’) until it drops to £10,000:
- If your ‘adjusted income’ (your total income plus personal and employer pension contributions) is above £260,000 in the current tax year, your annual allowance will be reduced by £1 for every additional £2 earned.
- This reduction will not apply if your ‘threshold income’ (your total income minus pension contributions) is £200,000 or less3.
For example, if you earn £250,000 and pay £30,000 into your pension, your threshold income is £220,000. If your employer also contributes £30,000, your adjusted income is £280,000.
This is £20,000 above £260,000, so your annual allowance reduces by £10,000 to £50,000. In this example, you and your employer have contributed a total of £60,000, so you would usually need to pay income tax on the £10,000 that exceeds your tapered allowance.
The rules around tapering are complicated, so if you think you’re likely to be affected it’s worth seeking financial advice.
Carry forward rules
It may be possible to contribute more than your annual allowance by carrying forward unused annual allowances from the previous three tax years.
To do this, you need to have been an active member of a pension scheme during that time. You also need to use up your full allowance for the current tax year first and have earned at least what you wish to contribute. For example, if you want to make a total contribution of £100,000, you must earn at least £100,000 in that tax year.
If you don’t earn an income
If you don’t earn an income and don’t pay income tax, you can still get tax relief on pension contributions. The annual allowance for non-earners is £3,600. You can pay in up to £2,880 and get up to £720 in tax relief from the government. This can’t be carried forward to future tax years.
Money purchase annual allowance
Once you start taking money from your pension, your annual allowance may be reduced to £10,000. This is known as the money purchase annual allowance (MPAA)4.
The MPAA is triggered if you start taking income from your pension under flexible income drawdown or if you take an individual lump sum that is a mix of tax-free cash and income, known as Uncrystallised Funds Pension Lump Sum (UFPLS). This reduced allowance can’t be carried forward to future tax years.
The MPAA won’t be triggered if you leave your pension money untouched or only take your 25% tax-free cash.
Learn more about withdrawing your pension money.
Tax relief can be a powerful way to boost your pension savings. Understanding how it works and the limits that apply could help you make the most of every contribution and achieve a more comfortable retirement.
1 For the 2026-27 tax year, individuals earning between £50,271 and £125,140 fall within the higher-rate tax band, which is taxed at 40%. Any earnings above £125,140 are taxed at 45%.
2 For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual.
3 For more on working out your 'adjusted' and 'threshold' income, visit Gov.uk.
4 Under certain circumstances such as ill-health, and depending on a pension scheme’s rules, it may be possible to withdraw pension funds earlier. However, early withdrawals may also be classed as unauthorised and liable to a 55% tax charge. Visit Gov.uk for more information.
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Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.
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