Complete Guide to UK Pensions
All tax calculations in this guide use 2025/26 tax year rates and thresholds.
Pensions are the most tax-efficient way to save for retirement in the UK. The government gives you tax relief on contributions, your investments grow tax-free, and normally employers contribute too. They can also help secure benefits such a free childcare. But the system is complex, with multiple pension types, contribution limits, and several cliff edges that can catch high earners.
This guide explains everything you need to know about UK pensions, from how tax relief works to which type of pension is right for you, and how to avoid the traps that reduce your tax relief or childcare benefits.
The Three Types of Pension
| Pension Type | Who It's For | How You Contribute | Employer Contribution? |
|---|---|---|---|
| Workplace Pension | Employees | Automatic deduction from salary | Yes (minimum 3%) |
| SIPP (Self-Invested Personal Pension) | Anyone (especially self-employed, contractors) | You set up and manage yourself | No (unless via employer) |
| State Pension | Everyone with NI record | Via National Insurance contributions | N/A |
How Pension Tax Relief Works
The government encourages pension saving by giving you tax relief on contributions. This means that for every £1 you pay into your pension, you get back some of the tax you paid on that income. The amount depends on your tax rate.
Tax Relief by Rate
| Tax Rate | Your Contribution | Government Top-Up | Total in Pension | Effective Cost |
|---|---|---|---|---|
| Basic rate (20%) | £80 | £20 | £100 | £80 |
| Higher rate (40%) | £60 | £20 automatic + £20 via tax return | £100 | £60 |
| Additional rate (45%) | £55 | £20 automatic + £25 via tax return | £100 | £55 |
Important: Basic-rate tax relief (20%) is usually added automatically to your pension. Higher and additional rate taxpayers need to claim the extra relief through their self-assessment tax return.
Workplace Pensions: The Default for Employees
How They Work
If you're an employee earning over £10,000/year, your employer must automatically enrol you in a workplace pension scheme. Both you and your employer contribute:
- You contribute at least 5% of your salary
- Your employer contributes at least 3%
- Total: minimum 8% going into your pension
Many employers offer better rates, some match your contributions up to 10% or more. Always check your employer's scheme details.
Salary Sacrifice vs Relief at Source
Workplace pensions use one of two methods:
Salary Sacrifice (also called Salary Exchange): Your salary is reduced before tax, including what would have been tax and National Insurance and the full amount goes into your pension. The key advantage of this method is that while Relief at Source saves you money on income tax, only Salary Sacrifice saves you National Insurance (8% or 2%) as well as income tax. This is the most tax-efficient method.
Relief at Source: You pay in from your net (after-tax) salary, and the pension provider claims back 20% tax relief from HMRC. If you're a higher-rate taxpayer, you claim the additional 20% through your tax return.
| Method | Gross Salary | Pension Contribution | Taxable Income | Tax + NI Paid | Take-Home | In Pension |
|---|---|---|---|---|---|---|
| No pension | £50,000 | £0 | £50,000 | £10,480 | £39,520 | £0 |
| Salary sacrifice | £50,000 | £5,000 | £45,000 | £9,080 | £35,920 | £5,000 |
| Relief at source | £50,000 | £4,000 (you pay) + £1,000 (HMRC) | £50,000 | £10,480 | £35,520 | £5,000 |
Salary sacrifice saves you an extra £400 of NI on a £5,000 contribution (8% main-rate NI)
The November 2025 Budget confirmed a phased reduction to the National Insurance savings from salary sacrifice. From April 2028 (three tax years after the announcement), only a limited portion of pension contributions is expected to stay exempt from employee and employer NI; anything above that threshold will still get income tax relief but will be treated like relief-at-source for NI, meaning the NI saving disappears.
- Check how your employer will implement the cap and whether matching rules change.
- Consider advancing planned salary sacrifice contributions before the taper starts if cash flow allows.
- Watch for scheme updates in 2026/27 when providers publish the detailed thresholds.
We'll update this guide once the legislation is final. Speak to a regulated adviser before making irreversible changes to your pension strategy.
SIPPs: Personal Pensions for Control and Flexibility
What They Are
A SIPP (Self-Invested Personal Pension) is a pension you set up yourself, usually through a provider like Vanguard, Fidelity, or AJ Bell. You choose what to invest in, and you control how much and when you contribute.
Who Needs a SIPP?
- Self-employed people (no workplace pension)
- Contractors who want to contribute more than their company pension allows
- People who want more investment choice than their workplace pension offers
- Anyone consolidating multiple old workplace pensions
How SIPP Contributions Work
With a SIPP, you use "relief at source" (you pay in from your net salary), and the provider claims 20% tax relief from HMRC. If you're a higher or additional-rate taxpayer, you claim the extra relief through your tax return.
You want £10,000 in your pension:
- You pay: £8,000 into your SIPP
- Provider claims from HMRC: £2,000 (20% basic relief)
- Total in pension: £10,000
On your tax return:
- Your taxable income reduces by £10,000
- You save additional 20% higher-rate tax: £2,000
- This comes back as a tax refund or reduced tax bill
Net cost: £8,000 - £2,000 = £6,000 to put £10,000 in your pension
The State Pension
The State Pension is a regular payment from the government when you reach State Pension age (currently 66, rising to 67). You build up your entitlement by paying National Insurance during your working life.
How Much You Get
- Full State Pension (2024/25): £221.20/week = £11,502/year
- You need 35 years of NI contributions for the full amount
- Minimum 10 years to get anything
Check your State Pension forecast at Gov.uk to see how much you'll get and whether you have gaps in your NI record.
If you claim Child Benefit whilst not working or earning under the NI threshold, you automatically get NI credits towards your State Pension. But if you don't claim Child Benefit (because of the High Income Child Benefit Charge), you won't get these credits. You can still claim but elect not to receive payments to protect your State Pension.
Contribution Limits and Allowances
Annual Allowance: £60,000
The annual allowance is the maximum you can contribute to pensions each year whilst still getting tax relief. For most people, this is £60,000 per year (2024/25).
This includes:
- Your contributions
- Your employer's contributions
- Tax relief added by the government
If you go over, you pay a tax charge on the excess. However, you can "carry forward" unused allowance from the previous 3 tax years if you were a member of a pension scheme.
Tapered Annual Allowance (High Earners)
If your "threshold income" is over £200,000, your annual allowance reduces by £1 for every £2 over £260,000, down to a minimum of £10,000.
| Income | Annual Allowance | Impact |
|---|---|---|
| Up to £260,000 | £60,000 | Full allowance |
| £280,000 | £50,000 | Reduced by £10,000 |
| £300,000 | £40,000 | Reduced by £20,000 |
| £360,000+ | £10,000 | Minimum allowance |
Important: The taper only applies if your threshold income (basically income before pension contributions) exceeds £200,000 AND your adjusted income exceeds £260,000.
Lifetime Allowance: Abolished
The lifetime allowance (which previously capped total pension savings at £1,073,100) was abolished in April 2024. You can now build up as much in your pension as you like without a tax charge.
Pension Strategies for Different Incomes
Earning £50,000 - £60,000
Priority: Maximise employer match, consider Child Benefit
- Contribute enough to get full employer match (often 5-10%)
- If you have children, consider whether extra pension contributions could keep you under £60k and avoid the Child Benefit charge
- Use salary sacrifice if available (saves NI)
Income: £62,000
Child Benefit at risk: £1,331/year (one child)
Strategy: Increase pension contribution by £2,000/year
- Adjusted net income: £60,000
- Keep full Child Benefit: £1,331
- Cost of £2,000 pension (higher rate): £1,200
- Net gain: £131 + £2,000 in pension
Earning £100,000 - £125,140
Priority: Avoid personal allowance taper (effective 60% tax rate)
- Between £100k and £125,140, you lose £1 of personal allowance for every £2 earned
- This creates an effective tax rate of 60% (40% income tax + 20% lost allowance)
- Contributing to pension reduces your adjusted net income and preserves your personal allowance
- Also preserves childcare benefits (Tax-Free Childcare and free childcare hours)
Income: £110,000
Lost personal allowance: £5,000 (costs £2,000 extra tax)
Strategy: £10,000 pension contribution
- Adjusted net income: £100,000
- Keep full personal allowance: saves £2,000 tax
- Cost of £10,000 pension (via salary sacrifice): ~£5,400 take-home
- Net position: Pay £5,400, gain £10,000 pension + £2,000 tax saved
Earning Over £150,000
Priority: Maximise tax relief at 45%, watch tapered allowance
- Every £1 into pension saves you 45p tax + 2% NI (via salary sacrifice)
- If over £260,000, watch for tapered annual allowance
- Consider carry forward from previous years to maximise contributions
Common Pension Mistakes to Avoid
If you're a higher or additional-rate taxpayer and contribute to a SIPP or use relief-at-source, you must claim the extra tax relief through your self-assessment return. HMRC doesn't do this automatically. Many people leave thousands unclaimed every year.
Large bonuses or employer contributions can push you over the £60,000 annual allowance. Check your pension statements and use carry forward if needed. Going over means a tax charge on the excess.
If your employer matches contributions up to 10% but you only contribute 5%, you're leaving free money on the table. Always contribute enough to get the full employer match.
Each time you change jobs, you might leave behind a small pension. These often have higher fees and poor investment choices. Consider consolidating old pensions into a SIPP for better control and lower costs.
When to Access Your Pension
You can start taking money from your pension from age 55 (rising to 57 in 2028). You have several options:
25% Tax-Free Lump Sum
You can take up to 25% of your pension as a tax-free lump sum. The rest is taxed as income when you take it.
Pension Income (Drawdown or Annuity)
- Drawdown: Keep your pension invested and take income as needed (taxed as income)
- Annuity: Exchange your pension pot for guaranteed income for life (taxed as income)
Once you start taking pension income (beyond the tax-free lump sum), you trigger the "Money Purchase Annual Allowance" which reduces your future pension contribution limit to £10,000/year. Get financial advice before accessing your pension.
How Our Calculator Helps
Our tax calculator shows you:
- How much a pension contribution reduces your tax bill
- Whether you're in the £100k-£125k "60% tax zone" and how much to contribute to escape it
- Whether pension contributions would preserve childcare benefits
- The net cost of pension contributions after tax relief and NI savings
- Whether you're approaching the tapered annual allowance
Key Takeaways
- Pensions give you tax relief at your marginal rate (20%, 40%, or 45%)
- Salary sacrifice pensions save you NI as well as income tax (most tax-efficient)
- Budget 2025: salary sacrifice NI advantage will be capped from April 2028—check employer updates
- Higher and additional-rate taxpayers must claim extra relief through self-assessment
- Annual allowance is £60,000 for most people (tapered for income over £260,000)
- Pension contributions reduce adjusted net income, preserving childcare benefits and personal allowance
- The £100k-£125k range has an effective 60% tax rate. Pension contributions are especially valuable here
- Always contribute enough to get full employer match
- State Pension requires 35 years of NI contributions for the full amount
- You can access pensions from age 55 (rising to 57 in 2028)