It is thought that the first occupational pension, paid by an employer to a former employee, dates to 1590. The Chatham Chest was created to provide an income to wounded seamen from the Royal Navy. Much like you would with your workplace pension, the seamen paid a percentage of their wage into the fund each month. If they were injured, they received an income after being discharged from service.
Now, workplace pensions are a common way to build wealth for retirement. Since the introduction of auto-enrolment in 2012, your employer must enrol you in a pension scheme and contribute to it, provided you meet certain earning requirements.
Consequently, millions more UK workers are now saving in an occupational pension and benefiting from employer contributions. However, a recent study found that a remarkable number of those savers are failing to take full advantage of the tax benefits of their pension.
Indeed, PensionsAge reports that 2.3 million UK savers aren’t currently claiming additional tax relief they’re entitled to on their pension contributions.
Read on to learn how tax relief on pensions works and whether you could be missing out.
You automatically benefit from 20% tax relief on your pension contributions
Pensions are an effective way to save for retirement for several reasons. For instance, you may benefit from employer contributions on top of your own, so you can build your pot faster.
You also receive tax relief at your marginal rate of Income Tax on your contributions.
The first 20% – the basic rate of Income Tax – is applied automatically, and the way this works depends on how your pension scheme manages your contributions.
Net pay
Some pensions use a “net pay” arrangement. This means that your pension contributions are taken before Income Tax is deducted. As a result, your taxable income reduces and you pay less Income Tax.
For example, if you earned £2,000 a month and contributed £100 to your pension, HMRC would only consider the remaining £1,900 when calculating your Income Tax and National Insurance contributions (NICs).
Relief at source
Many workplace pensions use a “relief at source” arrangement. This means the amount of Income Tax you pay is calculated before your pension contributions are deducted from your remaining salary.
The government then essentially refunds the tax you paid on the amount you put into your pension.
In practice, this means if you wanted to contribute £100 to your pension, you would only pay £80 and your provider would then claim the additional £20 from the government and add it to your pot.
In both situations, the outcome is the same – you don’t pay Income Tax on the portion of your salary that you contribute to your pension.
You can benefit from this tax relief on contributions up to your Annual Allowance. In 2025/26, this is £60,000 or 100% of your earnings, whichever is lower.
That said, if you’re a high earner or have flexibly accessed your defined contribution (DC) pension, your Annual Allowance could be lower than this.
Higher- and additional-rate taxpayers can claim extra tax relief through self-assessment
The tax relief you’re entitled to is dependent on your marginal rate of Income Tax. So, if you pay basic-rate tax at 20%, you receive your full entitlement automatically.
However, if you’re a higher- or additional-rate taxpayer with a marginal rate of 40% or 45% – and you pay into a relief at source pension – you only receive the basic rate of 20% on your contributions.
Fortunately, you can claim the extra 20% or 25% to bring the tax relief in line with your marginal rate.
To do this, you need to fill out a self-assessment tax return, giving details of your contributions. HMRC then calculates the additional tax relief you’re entitled to and repays it. You can choose to:
- Receive a rebate (which you could then pay into your pension)
- Reduce your tax bill for the current year (if you’re paying through self-assessment)
- Adjust your tax code so you pay less Income Tax in the future.
Claiming all the tax relief you’re entitled to could help you build your savings more effectively, meaning you can achieve a better standard of living in retirement.
However, the research reported by PensionsAge found that 46% of higher- and additional-rate taxpayers said they weren’t currently claiming extra tax relief.
That means around 2.3 million people are missing out on “free” money going into their pension.
Failing to claim tax relief could reduce the size of your pension pot in retirement by £350,000
It may be easy to overlook additional tax relief, especially if you don’t need to file a tax return for any other reason. However, failing to claim your full entitlement could have a significant effect on the size of your savings pot in retirement.
According to PensionsAge, analysis shows that somebody paying £400 into their pension for 40 years could be £350,000 worse off if they don’t claim all the tax relief they’re entitled to.
Consequently, this oversight could mean that you have a smaller pension pot to draw from in retirement and may have to make sacrifices to your lifestyle.
We can help you take full advantage of the tax benefits of your pension
If you’re unclear about what kind of pension scheme you pay into, and how much tax relief you’re entitled to, we can advise you.
We’ll review your pensions with you and ensure that you are taking full advantage of all the tax benefits. This might include exploring alternative ways to contribute, such as salary sacrifice, which could be more tax-efficient.
Additionally, we can assess your investment choices and the growth you’re achieving, to ensure that you’re on track to reach your savings goal for retirement.
Get in touch
We are here to help you manage your pensions and save for your dream retirement.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.