Why do pensions get tax relief?
Money paid into a registered pension is, in effect, paid from your pay before income tax. The three methods below are three ways of doing that. They all end up giving relief at your top rate of tax, but they differ in timing, in whether you have to claim, and in what happens to National Insurance.
How does relief at source work?
Your contribution comes out of your pay after tax. The pension provider then claims basic-rate tax from HMRC and adds it to your pot. So when you pay £80, £100 goes into your pension. This is how personal pensions and many workplace schemes work.
If you pay tax above the basic rate, you can claim the rest: 20% more on income taxed at 40%, and 25% more on income taxed at 45%. In Scotland the extra is 1% at 21%, 22% at 42%, 25% at 45% and 28% at 48%. You claim it on a Self Assessment tax return, or by asking HMRC to adjust your tax code. On £60,000 with 5% going in (£3,000 gross), the extra relief is £600.00 a year.
How does a net pay pension work?
Your employer takes the contribution from your pay before working out income tax. You get relief at your top rate straight away and there is nothing to claim. National Insurance is still charged on your full pay. Many workplace and public-sector schemes use this method.
How does salary sacrifice work?
You agree to a lower salary, and your employer pays the difference into your pension. Because your pay is lower, income tax, your National Insurance and your employer’s National Insurance all fall. Some employers add part of their saving to your pension. The arrangement must not take your pay below the National Minimum Wage.
Which pension type leaves me the most take-home pay?
The same 5% pension on £40,000, a basic-rate taxpayer, in 2026/27:
| Type | Into pension | Cost to take-home | Take-home a month |
|---|---|---|---|
| Relief at source | £2,000 | £1,600 | £2,559.97 |
| Net pay | £2,000 | £1,600 | £2,559.97 |
| Salary sacrifice | £2,000 | £1,440 | £2,573.30 |
Relief at source and net pay cost the same here. Salary sacrifice costs £160 less a year, because it saves 8% National Insurance on the £2,000 as well.
Now the same 5% on £60,000, a higher-rate taxpayer:
| Type | Into pension | Cost to take-home | Cost after claiming |
|---|---|---|---|
| Relief at source | £3,000 | £2,400 | £1,800 |
| Net pay | £3,000 | £1,800 | £1,800 |
| Salary sacrifice | £3,000 | £1,740 | £1,740 |
With relief at source the payslip cost looks higher at first, but once the extra £600 is claimed back it matches net pay. Salary sacrifice is cheapest again, this time by the 2% National Insurance paid above £50,270.
What does a pension do to my monthly pay?
On £36,000 with a 5% net pay pension, £150.00 goes into the pension each month. Take-home pay falls from £2,453.30 to £2,333.30: only £120.00 less, because the income tax line drops by £30.00 at the same time.
What should I watch out for?
- Claim higher-rate relief. With relief at source, the extra relief is not automatic. Many people never claim it.
- Salary sacrifice from April 2029. The government has announced that only the first £2,000 a year sacrificed into a pension will be free of National Insurance. Tax relief stays.
- Low earners. If you earn under the Personal Allowance, relief at source still adds 20%, while net pay has no tax to save. GOV.UK explains how the government tops up net pay savers in that position.
- Allowances. There is a yearly limit on tax-relieved pension savings (the annual allowance). Most people are well under it; GOV.UK has the details.
What will my pension cost me?
Put your pension in the calculator as a percentage or in pounds, pick the type, and it shows the cost to your take-home pay and any relief to claim.