How pension tax relief works

Tax is rarely a relief so the term ‘tax relief’ can often confuse, especially when we’re told it’s one of the best things about pensions.

Here, we explain how pension tax relief works and why, provided you stick within your pension allowances, it can give your retirement savings a valuable boost.

What is pension tax relief?

Tax relief essentially means that some of the money that you would have paid in tax to the government goes into your pension instead. What this means in practice is that when you or your employer pays into your pension, the government will also chip in.

Most UK taxpayers automatically get tax relief on any pension contributions at the basic rate of tax which is 20%. So, if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax.

If you’re a higher rate taxpayer who pays income tax at a rate of 40%, you can claim even more tax relief back, so paying £100 into your pension will cost you just £60. You’ll usually get 20% of this back automatically and then will have to claim the remaining 20% through your tax return or by calling HMRC.

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 contributions.

Some employers have what’s known as a ‘net pay’ arrangement so that your pension contributions are taken from your salary before income tax is paid on them, and the pension scheme claims back tax relief at your highest rate of income tax, which means you may not have to fill in a tax return. Check with your scheme provider if you’re not sure whether they do this.

Can non-taxpayers claim tax relief on pension contributions?

Yes, if you’re not earning enough to pay income tax, you can still get basic rate tax relief on pension contributions up to £2,880 each year. So if for example, you’re in a relationship and taking a career break, your partner might decide to make pension contributions on your behalf until you start work again.

If the maximum £2,880 is paid into your pension over the year, this means that once tax relief is added, you’ll end up with £3,600 of retirement savings.

Stay within tax relief limits

You’re only entitled to tax relief on a certain amount of pension contributions each tax year, known as your Annual Allowance.

This allowance enables you to get tax relief on pension contributions of up to 100% of your earnings, or £40,000 a year, whichever is lower, across all the pensions you have. If you’re earning £60,000 a year for example, that means you’d be able to pay up to £40,000 of this into your pension.

The £40,000 limit covers any contributions you or your employer make and includes tax relief.

You can carry forward any unused Annual Allowances from the previous three years, as long as you were a member of a pension scheme during those years.

If you’re on a very high income, your Annual Allowance reduces. If your income added to any pension contributions you or your employer make (known as your ‘adjusted income’) is more than £150,000, then for every £2 it goes over this limit, your Annual Allowance goes down by £1. The maximum amount it can reduce is £30,000, so if you have an annual income of £210,000 or more, your Annual Allowance will be £10,000.

The Chancellor announced in the Budget that these thresholds will change from the start of the new tax year on April 6, 2020. The Annual Allowance will only start to reduce for those with earnings over £240,000 from this date, but the taper will gradually shrink the minimum Allowance to just £4,000, down from £10,000.

There’s also a Lifetime Allowance, which is the maximum you can save into your pensions without having to pay any extra tax charges when you take money out of them.

The Lifetime Allowance is currently £1.055m but will rise to £1.073m in the 2020/21 tax year.

You can find out more about how the Annual and Lifetime Allowances work in our article Understanding your pension allowances.

What happens if I’ve already started taking benefits from my pension?

If you’ve started taking an income from your pension, but still want to keep paying into it, the good news is that you are still able to benefit from tax relief on future contributions. The amount you can pay in each year, your Annual Allowance, however falls to £4,000 and becomes known as the Money Purchase Annual Allowance (MPAA).

Accessing your pension

Bear in mind that you won’t be able to touch the money in your pension, including any tax relief on your contributions, until you reach the age of 55, rising to 57 by 2028.

It’s also worth remembering that pension tax rates and benefits can change and are dependent on your personal circumstances so there are no guarantees that current rules will continue to apply in future. If you’re not sure about investing or how pensions work, it can be a good idea to seek professional independent financial advice.

You can find a local financial advisor on VouchedFor or, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.


Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Join Rest Less Money Club

Helpful tips and guidance for making the most of your money – straight to your inbox

By providing us your email address you agree to receive emails and communications from us and acknowledge that your personal data will be used in accordance with our Privacy Policy and Terms and Conditions. You can unsubscribe at any time by following the link in our emails.

Join the Rest Less Money Club

Helpful tips and guidance for making the most of your money – straight to your inbox

Good luck with your application

Before you go, we’d love to stay in touch to find out how you get on. Sign up to Rest Less today to get free job alerts and inspiring content sent straight to your inbox.
By providing your email you agree to receive emails and communications from us and acknowledge that your personal data will be used in accordance with our Privacy Policy and Terms and Conditions. You can unsubscribe at any time through the link in our emails.