How do Pension Contributions Work?
Whether you have joined a workplace pension or are putting money aside into a SIPP, it’s important to know how pension contributions work. Here we talk about who actually puts money into a pension, what tax relief means for you and how much you can (and should) put in.
Who contributes?
If you have a workplace pension, your employer will be making contributions. To comply with auto-enrolment rules, they must put in a minimum of 3% of your gross salary. If you are making personal contributions too, this will be a minimum of 5% for a total 8% of your salary. You can usually increase these contributions and make additional payments into your pension yourself. You will also be receiving tax relief on the contributions you make.
Your contributions are taken directly from your salary when you are paid either via salary sacrifice or net pay. With salary sacrifice, you agree to reduce your gross salary in exchange for a pension contribution. This lowers your tax and NI burden. Net pay involves deducting the contribution after income tax is calculated. This lowers your income tax potentially but not your NI contributions. Your employer will be able to tell you which method is used by your workplace pension.
If you have a personal pension, it is likely that you are making contributions from your bank account. It may be possible to ask your employer to contribute too but they will need to agree to this. Your contributions will attract tax relief as long as you are contributing within the maximum limits (see below).
Your state pension is funded by your national insurance contributions. You build entitlement to a state pension over the years by paying NI, receiving NI credits or making voluntary contributions. To qualify for the State pension you must have been making NI contributions (or equivalent) for 35 years.
What are the pension contribution limits?
You can contribute as much as you like to your pension (or pensions) but there are limits to how much the government will allow you to receive tax relief. Be prepared to potentially pay tax on anything over certain amounts….
You can tax relief on contributions up to your gross salary in a single tax year. So, if you earn £30,000 a year, you can put in up to £24,000 and receive £6,000 in tax relief. Anything over £24,000 will not qualify for tax relief. Please bear in mind that your pension provider may not accept contributions that do not attract tax relieve so you will need to let them know if you have paid in too much. This limit applies to all of the pensions you have.
The Annual Allowance
The other limit to be aware of is the Annual Allowance. This is the total amount of contributions (personal and employer) you can make without incurring a tax charge. This limit can be changed by government and is currently £60,000 (as of tax year 2025/26). It applies to everyone earning under £200,000 a year. If you earn more than £60,000 and contribute the maximum you can to earn tax relief, you will need to pay tax on the excess contribution to effectively repay the tax relief you have received.
For example, if you earn £80,000 per year, you could technically get £16,000 tax relief on net contributions of £64,000. However, you will need to report via self assessment that you have exceed the annual allowance by £20,000 gross (16,000 net) and pay back the 20% tax relief.
Other limits to be aware of
If you earn over £200,000 (£260,000 adjusted to include employer pension contributions), you will be subject to the ‘tapered annual allowance’. This reduces the AA (currently £60,000) by £1 for every £2 over £260,000 adjust income you earn. Your accountant will be able to calculate this for you and help you with Self Assessment forms.
To complicate matters even more, if you are taking a flexible drawdown income, your annual allowance is reduced to £10,000 per year. Your pension provider will let you know if you trigger this limit.
How much is enough?
The answer here depends on how old you are now and how much you will need to live on after you retire. Remember that your pension at retirement can go up and down based on market fluctuations and fees as well as the amount going in. The key is to save what you can afford and start as early as possible.
There are a lot of pension calculators out there that will let you know how much you should be contributing to make sure you can keep your current lifestyle after you stop work. These will give you an indicator of where you are and what you could get back based on factors like inflation, investment growth and how you want to take your income.
5 Pension Calculators to help you plan for Retirement
What about tax relief on my pension contributions?
We’ve talked a bit about tax relief and how much you could get back from the government at basic rate. But, how does it all work really?
Pensions are a tax-friendly way of saving for a specific reason – your retirement. One of the benefits of paying into a pension is tax relief – the government top up to your pension that reflects the basic amount of income tax you currently pay.
So, for a personal contribution of £100, you put in £80 and the government puts in £20. If you are a high rate tax payer, you can apply to receive extra tax relief directly.
How you receive tax relief depends on your pensions scheme and how your contributions are deducted. If you pay contributions after tax is deducted, your provider will use what’s known as Relief at Source (RaS). This method adds the tax relief at a later date via a claim completed by the pension scheme provider. If your pension contributions are taken before tax (ie. via net pay or salary sacrifice), tax relief is paid immediately.
