Putting money in
Making contributions into your workplace pension
Whatever your goals, it’s crucial to start saving for your retirement. Putting aside money isn’t always easy but it’s essential to achieving financial security for your future.
Putting money into your workplace pension is one way to do this. If you're part of your workplace scheme, your employer will already be making contributions on your behalf. But making additional payments yourself, if you can, can also be helpful.
What’s more, you’ll get tax relief on what you put in. This effectively reduces how much income tax you pay and boosts what goes into your pension.
The way the contribution is deducted depends on the type of pension scheme the employer is using.
Your employer deducts your contributions from your pay before it’s taxed and paid out to you – so you only pay tax on what you earn after your pension contribution has been deducted.
This means you get full tax relief at your highest ‘marginal’ rate of income tax. If you don’t pay UK income tax - for example, if your earnings are below the current personal allowance – your contributions will be deducted before salary is paid out to you. However, you won't benefit from tax relief using this method. This method of tax relief applies to occupational pension schemes.
Your employer might offer a salary sacrifice arrangement (sometimes called salary exchange). Here, you agree to sacrifice part of your salary in exchange for an employer contribution. You won't pay income tax or National Insurance on the amount you sacrifice. The tax and National Insurance savings can be used to either boost your pension contribution while keeping your take-home pay the same, or keep your contribution the same and boost your take-home pay.
Salary sacrifice isn't suitable for everyone and shouldn't be used where the post-sacrifice salary will be less than the National Minimum Wage.
Here, your employer deducts your contributions from your pay after it’s taxed. Your pension scheme will then automatically add basic-rate tax relief to your pension fund when they receive your contribution. If you pay a higher rate of tax, you can claim further tax relief by contacting HM Revenue & Customs or through your annual self-assessment tax return.
If you’re a non-taxpayer you can still get basic-rate tax relief on your contributions up to a certain level(Opens new window).
Tax relief for personal pension schemes is given using the relief at source method.
The maximum you can put in
Because pension contributions attract valuable tax relief there are limits on how much you can put in:
The annual allowance - the maximum amount of pension savings you can have each year that benefit from tax relief. In practice, you're subject to a tax charge (the annual allowance charge) where your pension savings (including employer contributions), exceed your available annual allowance for a tax year.
There's nothing to stop you paying in more than your available annual allowance. You'd have to pay an annual allowance charge on the excess but could still claim tax relief on all your personal and third party contributions up to the higher of 100% of your relevant UK earnings or £3,600 per annum.
The annual allowance charge(Opens new window) will probably negate most (if not all) tax relief on the excess above the annual allowance.
The money purchase annual allowance – if you’ve flexibly accessed benefits from a pension, you're subject to a money purchase annual allowance (MPAA) that limits the future contributions you can make to your pension. See the current money purchase annual allowance(Opens new window).
Tapered annual allowance - restricts pensions tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with adjusted income of over £240,000 and threshold income in excess of £200,000. See if the tapered annual allowance affects you(Opens new window)(Opens new window)(Opens new window)(Opens new window)(Opens new window)(Opens new window).
The value of any tax relief depends on your individual circumstances. This information is based on our understanding of current taxation law and HMRC practice(Opens new window), which may change.