Pension Contributions & Tax Relief: How Much Can You Save?
Guide to pension tax relief in the UK for 2025/26. Learn about auto-enrolment, contribution limits, salary sacrifice, and how pensions reduce your tax bill.
Last updated: February 2026
How Pension Contributions Reduce Your Tax
Pension contributions come out of your salary before income tax is calculated. This means every £100 you put into your pension only costs you £80 if you're a basic rate taxpayer (20%), £60 if you're a higher rate taxpayer (40%), or £55 if you're an additional rate taxpayer (45%).
Auto-Enrolment: The Minimum
Since 2019, most employees are automatically enrolled in a workplace pension with minimum contributions:
| Contribution | Minimum Rate | On £30,000 Salary |
|---|---|---|
| Employee | 5% | £1,500/year |
| Employer | 3% | £900/year |
| Total | 8% | £2,400/year |
These percentages apply to "qualifying earnings" — income between £6,240 and £50,270. Your employer may calculate on full salary instead.
Tax Relief by Tax Band
The true cost of pension contributions depends on your tax bracket:
| Tax Band | Gross Contribution | Tax Saved | Actual Cost to You |
|---|---|---|---|
| Basic (20%) | £100 | £20 | £80 |
| Higher (40%) | £100 | £40 | £60 |
| Additional (45%) | £100 | £45 | £55 |
Annual Allowance
You can contribute up to £60,000 per year (or 100% of your earnings, whichever is lower) and receive tax relief. This includes both employee and employer contributions.
If you earn over £260,000, your annual allowance tapers down to a minimum of £10,000.
You can also carry forward unused allowance from the previous 3 tax years, potentially allowing contributions well above £60,000 in a single year.
Salary Sacrifice
Some employers offer salary sacrifice for pensions. Instead of you paying pension contributions from your net pay, your employer reduces your gross salary and pays the full amount directly into your pension.
The benefit: you save National Insurance as well as income tax. On a £40,000 salary with 5% sacrifice:
- Normal contribution: You save £400 income tax. NI unchanged.
- Salary sacrifice: You save £400 income tax plus £160 NI (8% of £2,000).
- Extra saving: £160/year
Your employer also saves 15% NI on the sacrificed amount, and many pass some of this saving back to you as additional pension contributions.
Impact on Take-Home Pay
Increasing your pension contribution reduces your take-home pay, but by less than you might expect thanks to tax relief:
| Salary | Pension % | Gross Contribution | Take-Home Reduction |
|---|---|---|---|
| £30,000 | 5% | £1,500 | £1,200 (basic rate) |
| £30,000 | 10% | £3,000 | £2,400 (basic rate) |
| £60,000 | 5% | £3,000 | £1,800 (higher rate) |
| £60,000 | 10% | £6,000 | £3,600 (higher rate) |
The £100,000 Pension Trap
If you earn between £100,000 and £125,140, your personal allowance reduces by £1 for every £2 over £100,000. This creates an effective 60% tax rate in this band. Making pension contributions that bring your income below £100,000 restores your full personal allowance — an extremely efficient use of pension tax relief.
Use our salary calculator to see how different pension contribution rates affect your take-home pay.
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