Tax relief on contributions
Relief at source, net pay or salary sacrifice: how your pension gets its tax relief
Every UK pension gives tax relief in one of three ways, and the way your scheme uses decides whether you must claim anything, whether you save NI and what happens if you earn little.
Independent site, not a government service. Relief is claimed through your pension provider, your payroll or HMRC (Self Assessment or the GOV.UK claim service).
Pension tax relief reaches you by one of three routes. Under relief at source, used by every SIPP and personal pension and by many workplace schemes, you pay from taxed income and the provider adds basic rate relief, 25% of what you pay; higher and additional rate taxpayers claim the rest from HMRC (GOV.UK, pension tax relief). Under a net pay arrangement, the employer deducts the contribution from your pay before Income Tax is worked out, so you get relief at your top rate straight away and have nothing to claim. Under salary sacrifice, you give up salary and the employer pays it in; that saves National Insurance as well as tax. On a £40,000 salary, £3,000 gross into a pension costs £2,400 by relief at source, £2,400 by net pay and £2,160 by sacrifice. The methods differ most for people who earn below the Personal Allowance, for Scottish taxpayers and for anyone whose income crosses a threshold.
Relief at source or net pay, on a low salary
Example, not your result yet· change a figure to see yours
Relief at source costs you
£480
| Net pay costs you at the time | £600 |
| HMRC top-up the year after (net pay) | £120 |
| Net pay cost once topped up | £480 |
| Income Tax saved by net pay | £0 |
The net pay top-up is paid by HMRC after the tax year ends, to people whose income was below the Personal Allowance.
Figures checked by Radif Partners · Editorial policy · How the sums are done
How each method works, step by step
Relief at source
You pay £80. Your provider claims £20 from HMRC and adds it, so £100 is invested. The provider does this whatever your tax rate, even if you pay no tax at all, because the law treats the £80 as paid net of basic rate tax (Finance Act 2004, sections 188 to 192). If you pay tax at 40%, your basic rate band is extended by £100, which moves £100 of income from 40% to 20% and gives you another £20 back. In Scotland the band extension works across the Scottish bands, so the extra is 1%, 22%, 25% or 28% depending on your top rate. Either way, the extra relief has to be claimed: through Self Assessment, or through HMRC’s claim service if you are not in Self Assessment.
Net pay
Your employer takes £100 out of your pay before working out Income Tax. Your taxable pay falls by £100 and you save tax at your top rate: £20 for a basic rate taxpayer, £40 for a higher rate one. Nothing needs claiming. Because the relief works only by reducing tax, it gives nothing to someone whose pay is already below the Personal Allowance; for them, HMRC now pays a top-up the year after (HMRC, net pay arrangements). NI is not affected: it is still worked out on your full pay.
Salary sacrifice
Your contract changes so that you earn £100 less and your employer pays £100 into the pension as its own contribution. Your Income Tax falls as under net pay, and your NI falls too, by 8% of the amount up to £50,270 and 2% above. The employer saves 15% NI as well (HMRC, salary sacrifice). From 6 April 2029, under announced plans, only the first £2,000 a year of pension sacrifice will keep the NI saving.
Cost of £1,000 into a pension, by salary
| Salary | Relief at source | Net pay | Salary sacrifice | Net pay top-up |
|---|---|---|---|---|
| £10,000 | £800 | £800 | £1,000 | £200 |
| £12,570 | £800 | £800 | £1,000 | £200 |
| £16,000 | £800 | £800 | £720 | none |
| £40,000 | £800 | £800 | £720 | none |
| £60,000 | £600 | £600 | £580 | none |
| £110,000 | £400 | £400 | £380 | none |
The table shows the three things to watch. Below £12,570, net pay gives no relief through payroll, and the top-up only puts it right after the tax year. Between £12,570 and £50,270, relief at source and net pay cost the same, and sacrifice is cheaper by 8% NI. Above £50,270, all three end at the same Income Tax relief once the claim is made, and sacrifice is cheaper by 2%. At £110,000 the Personal Allowance taper makes every method worth 60% before NI.
The low earner case
Until April 2024 a part-time worker earning less than the Personal Allowance in a net pay scheme got no relief at all, while the same worker in a relief at source scheme got 20%. The fix the government chose is the top-up: HMRC uses the information that pension schemes and employers report to work out who contributed through net pay while earning below the allowance, and pays them 20% of the contribution after the tax year. It does not change anything for people above the allowance. Relief is still capped at 100% of earnings, or £3,600 gross for a non-earner, so someone earning £11,000 gets relief on up to £11,000 gross.
The most you can pay in with tax relief
Example, not your result yet· change a figure to see yours
Gross limit on relief
£11,000
| Paid from your bank (relief at source) | £8,800 |
| Annual allowance | £60,000 |
| Limit for a non-earner | £3,600 |
Scotland: where the methods diverge
Scottish taxpayers face a twist. Relief at source providers always add 20%, but the starter rate in Scotland is 19%. HMRC does not ask the extra 1% back from starter rate taxpayers, so relief at source gives them a little more than net pay would. Intermediate rate taxpayers, at 21%, can claim an extra 1%. On £18,000, a Scottish taxpayer's £1,000 costs £800 by relief at source and £800 by net pay; on £25,000 the costs are £800 and £800. The Scottish relief guide covers every band.
Thresholds that only some methods see
All three methods reduce adjusted net income, the figure that drives the Personal Allowance taper and the High Income Child Benefit Charge, but in different ways. Net pay and sacrifice reduce it automatically because your taxable pay is lower. Relief at source reduces it only once HMRC knows the gross contribution, through your return or a claim. For the annual allowance taper, salary sacrifice is added back to threshold income while relief at source is deducted, which matters only above £200,000.
What to do with this
- Check the method on your payslip and statement.
- Under relief at source with income above £50,270, or above £43,663 in Scotland, claim the extra relief, back four years if needed.
- Under net pay with income below £12,570, look for the HMRC top-up after the tax year.
- If sacrifice is offered, compare it on the salary sacrifice calculator, which shows the April 2029 change.
- Run your own figures in the pension tax relief calculator, which works out all three methods.
The higher rate relief guide goes into the claim itself.
Four savers, four results
A school cleaner on £11,000 pays £480 a year into a workplace pension. In a relief at source scheme, £600 is invested and she keeps it all. In a net pay scheme, £600 is invested but her pay was below the allowance, so she gets no relief through payroll; HMRC's top-up of £120 arrives after the tax year. A shop manager on £32,000 sees no difference between the two methods, but saves another £48 of NI on each £600 if his employer offers sacrifice. An engineer on £65,000 in a relief at source scheme must claim £120 on each £600 gross herself, while her colleague in a net pay scheme gets it on payday. And a Scottish nurse on £24,000, in the intermediate band, can claim an extra 1% that a net pay scheme would give her automatically.
Changing jobs or schemes
Moving to a new employer often means a new method. Check your first payslip: if the pension deduction is now after tax, you have moved to relief at source and may need to claim higher rate relief for the first time. If it moves from relief at source to net pay, any claim you set up through your tax code must stop, or HMRC will give the relief twice and ask for it back later. Telling HMRC about a change of contributions takes a few minutes in the personal tax account.
One last difference concerns the earnings limit. Under relief at source the provider adds relief before anyone checks your earnings, so a payment above them leads to a refund of the top-up later. Under net pay and sacrifice the deduction can never exceed your pay, so the issue does not arise.