Saving into a pension is one of the most tax-efficient ways of building a pot of money to fund your later life plans.
When you contribute to your pension, some of the money you would have paid in tax is added to your contribution. How much your contribution is topped up by depends on your marginal rate of Income Tax – i.e., the highest rate at which you pay tax. For example, if your income puts you into the higher rate tax bracket, you can claim 40% tax relief on pension contributions.
There are two main ways tax relief is applied to your pension contributions: relief at source and net pay.
Your employer deducts your pension contribution from your salary after tax and sends it to your pension provider. Your pension provider then claims 20% tax relief from the government and adds this directly to your pot.
If you are a higher or additional rate taxpayer, you have to claim any extra tax relief you are owed via a Self Assessment tax return.
With relief at source, you can get tax relief on pension contributions even if you don’t pay tax. As long as you don’t pay more into your pension than you earn in a given year (or more than £2,880 per year if you earn less than £3,600), your pension provider can still claim 20% tax relief on your contributions.
Your pension contribution is deducted from your salary before tax, meaning that you pay less tax on your earnings. This means you get tax relief straight away (and don’t have to claim it back via Self Assessment).
However, non-taxpayers do not benefit from government tax relief through the net pay method.
Although there is no limit to what you can save into your pension each year, there is a limit to how much you can save per year whilst still benefiting from tax relief. The current pension Annual Allowance is £60,000.
However, if you earn less than £60,000 per year, you can only contribute a sum that is equal or less than your ‘relevant’ UK earnings (i.e., your salary plus any bonuses, overtime pay or other taxable form of income).
So, if you earn £80,000 per year and want to contribute £65,000, you’ll only get tax relief on the first £60,000.
However, if you earn £35,000 per year but want to pay in £50,000, you’ll only get tax relief on the first £35,000.
The MPAA is a mechanism which, if triggered, reduces your pension Annual Allowance from £60,000 to just £10,000. It only applies to defined contribution pensions.
Triggers for the MPAA include:
Note that you won’t trigger the MPAA if you move your pot into drawdown but don’t take any income, or if you buy a lifetime annuity that remains level or increases).
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Higher earners get less tax relief on their pension contributions according to a sliding scale called the tapered annual allowance.
Your threshold income is all of your taxable earnings minus your pension contribution. Your adjusted income is all of your taxable income plus your employer’s pension contribution.
Essentially, for every £2 you earn over the adjusted income threshold of £260,000, your annual allowance will reduce by £1 (until it reaches a minimum of £10,000).
You can usually carry forward any annual allowance you have not used in the previous three tax years. You must have already used up your full annual allowance in a given tax year to benefit from carry forward, and you must have been a member of a UK-registered pension scheme in the tax year(s) whose allowance you want to carry forward.
If you are eligible for the tapered annual allowance, you can only carry forward unused annual allowance up to the taper. For example, if you contributed £30,000 in a given tax year and your tapered allowance was £40,000, you can only carry forward an unused allowance of £10,000.
Professional financial advice is key to making the most of your pension tax reliefs and allowances, ensuring you can build up a pension pot that will fund your desired lifestyle and deliver maximum tax efficiency.
Please do not hesitate to get in touch with the experts at RetireInvest to find out how you can save tax efficiently and enjoy a fulfilling and comfortable retirement.
The guidance and/or information contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
RetireInvest Limited is registered in England and Wales. Company Number 09916200. Registered Address 4 Finkin Street, Grantham, Lincolnshire, England, NG31 6QZ.
Tel: 0800 028 4040
RetireInvest Limited is an appointed representative of Quilter Financial Services Limited and Quilter Mortgage Planning Limited, who are authorised and regulated by the Financial Conduct Authority.
Quilter Financial Services Limited and Quilter Mortgage Planning Limited are entered on the FCA register (https://register.fca.org.uk) under reference 440703 and 440718.
Estate Planning, Trusts, and Tax Planning advice is not regulated by the Financial Conduct Authority.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Registered Address 4 Finkin Street, Grantham, Lincolnshire, England, NG31 6QZ.
Approver Quilter Financial Services Limited and Quilter Mortgage Planning Limited June 2025
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Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
