💡 How Pension Contributions Work

Written By M D C

When you pay into a pension, there are two main systems for how tax relief is applied:

1. Relief at Source

Used by most personal pensions, SIPPs, and some workplace schemes.

  • You pay contributions after tax.

  • Your pension provider automatically adds 20% basic rate tax relief (claimed from HMRC).

  • If you pay 40% or 45% tax, you need to claim the extra relief yourself through Self Assessment or by contacting HMRC.

2. Net Pay

Common in large employer schemes.

  • Contributions are taken before tax through payroll.

  • You automatically receive tax relief at your highest rate.

  • No need to claim anything separately.

📊 How Common Is Each Method?

According to HMRC data, roughly two-thirds of workplace pension savers are in net pay schemes, while about one-third are in relief at source.

However, almost all personal pensions and SIPPs — including those used by the self-employed or anyone saving independently — operate on the relief at source basis.

That means millions of higher-rate and additional-rate taxpayers could be missing out each year if they haven’t claimed their full entitlement.

💷 A Quick Example

Let’s say you’re a higher-rate taxpayer contributing £8,000 to a personal pension:

  • Your provider adds £2,000 (basic rate relief).

  • So £10,000 goes into your pension.

  • But you’re actually entitled to another 20% tax relief — worth £2,000 — from HMRC.

Unless you claim it, you’re effectively leaving £2,000 of your own money unclaimed every year.

🔍 How to Check If You’re Missing Out

  1. Ask your pension provider which method they use — relief at source or net pay.

  2. If it’s relief at source and you pay higher or additional-rate tax:

    • Log in to your HMRC account, or

    • Include your pension contributions on your next Self Assessment tax return.

HMRC will either refund the difference or adjust your tax code so you pay less tax going forward.

🚀 Why It Matters

Over time, unclaimed tax relief can make a huge difference to your retirement savings.

Industry research suggests higher-rate taxpayers collectively miss out on hundreds of millions of pounds each year — with individual losses reaching tens of thousands over a career.

A few minutes of admin today could mean thousands more in your pension tomorrow.

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👉 Visit keepitsimplemoney.co.uk to learn more.

M D C