How does the private pension tax relief work?

When you save into a pension, you may be entitled to a tax relief on pension contributions. This is called a private pension tax relief.

This is more or less equal to the tax you paid on the portion of the income that you paid into your pension.

Do I get tax relief on all my private pension contributions?

No.

There are two main ways to save money into your pension:

1. Net pay or salary sacrifice: your employer will deduct the pension contribution before calculating tax on your pay
2. Relief at source: here, the pension contribution is deducted after tax is calculated. HMRC will pay you a part of your tax automatically (what you paid at the basic rate), and if you pay more than 20% tax then you’ll need to submit a tax return and claim the rest (another 20-25%). This is how most private pensions and SIPPs work.

How much tax relief can I get?

This is great – how much can I contribute into my private pension?

In the 2024/25 tax year, you are allowed to contribute either:

• 100% of your income in a year
• £60,000 a year – this is your ‘annual allowance’

From 6th April 2023, the pension lifetime allowance has been abolished.

Do I need to do anything to get the automatic tax relief?

This depends on the rate of income tax you pay. If you’re a basic rate taxpayer (you’re earning under £50,270 in 2024/25), your pension provider will claim a 20% tax relief and add it to your pension pot.

In this case you don’t need to do anything.

When do I need to submit a Self Assessment tax return?

In one of these situations:

• You’re a higher rate taxpayer (earn more than £50,270) – you submit it so you can claim the additional tax relief (another 20-25% on top of the automatic 20% relief)
• You contributed more than your allowance and you got too much automatic tax relief – you’ll need to pay it back
• Your pension provider is not using automatic tax relief (most do, though).

You can also call HMRC to claim if your income is between £50,271 and £125,140, and they’ll just give you your tax relief through your tax code.

What you need to know if you earn over £100,000

If your an additional rate taxpayer (your income, together with the pension contributions that you make, goes over £125,140) then your annual allowance will be reduced.

The calculation is pretty complex, so as a rule of thumb just remember that when you earn over £200,000 in income you’ll only be able to contribute about £10,000 to your private pension (unless you use “salary sacrifice” or net pay).