Pension tax relief explained: what a contribution really costs in 2026/27
How UK pension tax relief works at 20%, 40% and 45%, the difference between net pay, relief at source and salary sacrifice, how higher-rate taxpayers claim the extra relief, and worked examples for 2026/27.
- Written by
- Arnold Gold, Product Manager
- Published
- 12 October 2026
- Figures checked
- 12 October 2026
How pension tax relief works
The government refunds the income tax you would have paid on money you put into a registered pension. In practice that means a contribution costs you less than the amount that lands in your pot: the difference is your tax relief, and it is worth more the higher your tax band.
Relief applies to contributions worth up to 100% of your annual earnings. If you have no earnings, you can still get relief on up to £2,880 a year (GOV.UK). The rate you get depends on the band your income is taxed at — for 2026/27, after a £12,570 Personal Allowance, England, Wales and Northern Ireland tax income at 20%, 40% and 45%, and the Personal Allowance is withdrawn by £1 for every £2 of income above £100,000 (GOV.UK income tax rates). Scotland sets its own bands from 19% to 48%.
What changes between people is not the relief itself but how it reaches you — and whether you have to do anything to collect it. That depends on which of three arrangements your pension uses.
Net pay, relief at source and salary sacrifice
Net pay. Your employer takes the contribution out of your pay before working out income tax, so you get relief at your full marginal rate automatically through PAYE. Nothing to claim. National Insurance is still charged on the full salary.
Relief at source. You pay 80% of the contribution out of your taxed pay, and your provider claims the other 20% from HMRC and adds it to your pot. Personal pensions and SIPPs work this way, as do some workplace schemes. If you pay tax above the basic rate, the provider's 20% is not the whole story — the extra relief is yours to claim, and many people never do.
Salary sacrifice. You agree to a lower contractual salary and your employer pays the difference into your pension. Because your pay is lower, both income tax and National Insurance fall. It is the only one of the three that saves NI, which is why it usually costs the least — but it lowers the salary figure used for some other things, so check how it affects you before agreeing.
Not sure which you have? Your payslip is the giveaway: net pay and salary sacrifice contributions are deducted before tax; relief at source contributions are taken from pay after tax, at 80% of the gross amount.
How much relief at each tax band
For relief at source, the provider always claims 20%. Anything above that is claimed by you. For 2026/27 the extra relief available is (GOV.UK):
| Where you pay tax | Income taxed at | Extra relief you claim |
|---|---|---|
| England, Wales, NI | 40% | 20% |
| England, Wales, NI | 45% | 25% |
| Scotland | 21% | 1% |
| Scotland | 42% | 22% |
| Scotland | 45% | 25% |
| Scotland | 48% | 28% |
The extra relief only applies to the part of your contribution that matches income taxed at the higher rate. If only £10,000 of your income is taxed at 40% and you contribute more than that, the rest gets basic-rate relief only. Scottish taxpayers whose income is taxed at 19% still get the provider's 20% and don't have to pay the difference back (Scottish income tax).
Worked examples
A basic-rate taxpayer on £35,000
Contributing £2,000 a year through relief at source, you pay £1,600 and the provider adds £400. Your take-home pay falls by £1,600 — 20% relief, and nothing else to claim.
A higher-rate taxpayer on £60,000
A £5,000 contribution through relief at source: you pay £4,000, the provider adds £1,000, and you claim another £1,000 through Self Assessment. Once claimed, the contribution has cost you £3,000 — 40% relief. Skip the claim and it costs £4,000.
The same salary in Scotland gets 42% relief on the same contribution, with £1,100 to claim, because more of it is taxed at 42%.
An earner on £110,000 in the Personal Allowance taper
Between £100,000 and £125,140, each extra £2 of income removes £1 of Personal Allowance, so income in that slice is taxed at an effective 60%. A £10,000 net-pay contribution brings income back towards £100,000 and restores allowance as it goes: it costs about £4,000 in take-home pay — 60% effective relief.
Run your own numbers in the pension tax relief calculator — it uses the same engine as these examples.
The three methods side by side
What a £5,000 gross contribution costs in take-home pay, in England, Wales or Northern Ireland, 2026/27, assuming any extra relief is claimed:
| Salary | Net pay | Relief at source | Salary sacrifice |
|---|---|---|---|
| £30,000 | £4,000 | £4,000 | £3,600 |
| £45,000 | £4,000 | £4,000 | £3,600 |
| £60,000 | £3,000 | £3,000 | £2,900 |
| £110,000 | £2,000 | £2,000 | £1,900 |
| £150,000 | £2,750 | £2,750 | £2,650 |
Net pay and relief at source end up at the same cost once the extra relief is claimed — the difference is who does the work. Salary sacrifice is cheaper at every salary because it also saves National Insurance.
Limits: earnings, the annual allowance and the taper
Earnings. Relief is limited to contributions of up to 100% of your relevant earnings in the tax year (or £2,880 with no earnings).
Annual allowance. The total going into your pensions in a tax year — from you, your employer and anyone else — is tested against the annual allowance of £60,000 (GOV.UK). You may be able to carry forward unused allowance from the previous 3 tax years. Above the allowance, a tax charge can apply, and it has to be reported on a Self Assessment return even if your provider pays it.
Tapered allowance. If your threshold income is over £200,000 and your adjusted income is over £260,000, the allowance falls by £1 for every £2 above £260,000, down to a minimum of £10,000 (HMRC guidance). The calculator flags when the taper applies.
Already drawing a pension? Taking money flexibly from a pension pot can trigger a lower money purchase annual allowance on future contributions — check before paying more in.
How to claim higher-rate relief
Only relevant to relief at source — net pay and salary sacrifice give full relief automatically.
- If you file Self Assessment: enter your gross contributions (what you paid plus the provider's 20%) in the pension section of your return.
- If you don't: claim from HMRC directly using its online service for tax relief on private pension payments (GOV.UK).
- Keep the numbers: your provider's annual statement shows the contributions and the basic-rate relief it claimed.
The relief usually comes back as a lower tax bill or an adjusted tax code rather than a payment into your pension.
Common mistakes
- Not claiming the extra relief. On relief at source, a higher-rate taxpayer who never claims gives up half their relief.
- Entering the net figure. The amount you pay into a relief-at-source scheme is 80% of the gross contribution — use the gross amount for the annual allowance and when claiming.
- Forgetting employer contributions. They count towards the annual allowance too.
- Ignoring salary sacrifice. If your employer offers it, it is usually cheaper than paying in the same amount yourself.
- Assuming every pension is registered. You cannot get relief on contributions to a scheme that isn't registered with HMRC.
Frequently asked questions
Frequently asked questions
How much tax relief do I get on pension contributions?
Relief at your highest rate of income tax: 20% for basic-rate taxpayers, 40% for higher-rate and 45% for additional-rate in England, Wales and Northern Ireland, with Scotland's own rates. Salary sacrifice also saves National Insurance.
Does my pension provider add 40% relief?
No. On relief at source the provider only claims the basic 20%. If you pay 40% or 45% tax, you claim the extra 20% or 25% yourself through Self Assessment, or from HMRC if you don't file a return.
Is salary sacrifice better than relief at source?
Usually cheaper, because it saves National Insurance as well as income tax. In our table, salary sacrifice costs less at every salary. Check how a lower contractual salary affects anything linked to it before agreeing.
What is the pension annual allowance for 2026/27?
£60,000, covering contributions from you, your employer and anyone else. You may be able to carry forward unused allowance from the previous 3 tax years, and high earners may have a tapered allowance down to £10,000.
Can I get tax relief if I don't work?
Yes, on contributions of up to £2,880 a year if you have no earnings — the provider still claims basic-rate relief on a relief-at-source pension.
Why is my relief 60%?
If your income is between £100,000 and £125,140, you are losing Personal Allowance, so that slice of income is effectively taxed at 60%. Pension contributions that bring your income down restore the allowance, so their effective relief can reach 60%.
Do I get relief on employer contributions?
Employer contributions aren't taxed as your income in the first place, so there's no relief for you to claim on them — but they do count towards your annual allowance.
Sources
Related guides
Not financial advice