Pension Contribution
Money paid into your pension pot, receiving tax relief at your marginal rate (20%, 40%, or 45%), up to the annual allowance.
Key Points
- ✓Tax relief at your Marginal Rate (20%, 40%, or 45%)
- ✓Annual Allowance of £60,000 (or 100% of earnings)
- ✓Unused allowance can be carried forward 3 years
- ✓Auto-Enrolment minimum is 8% (3% employer, 5% employee)
- ✓Employer matching is essentially free money
Detailed Explanation
Pension Contribution are amounts you and/or your employer pay into your pension scheme to build up retirement savings. Contributions receive tax relief, making pensions one of the most tax-efficient ways to save.
When you contribute to a pension, you receive tax relief at your Marginal Rate. Basic Rate Tax payers get 20% relief (£100 contribution costs £80), Higher Rate Tax payers get 40% relief (costs £60), and Additional Rate Tax payers get 45% relief (costs £55).
The Annual Allowance limits how much you can contribute with tax relief - currently £60,000 per year or 100% of your earnings, whichever is lower. You can Carry Forward unused allowance from the previous three tax years.
Under Auto-Enrolment, minimum contributions are 8% of qualifying earnings - with at least 3% from your employer. Many employers offer to match higher contributions, effectively giving you 'free money'.
Contributions can be made as 'relief at source' (you pay from net pay, pension provider claims back 20% basic rate, you claim Higher Rate Tax relief via Self Assessment) or 'net pay' (deducted from gross pay before tax is calculated).
Practical Examples
- •Basic Rate Tax payer contributing £100: Pay £80, pension provider adds £20 tax relief, total contribution £100
- •Higher Rate Tax payer contributing £1,000: Pay £800, get £200 basic relief automatically, claim £200 more Higher Rate Tax relief = net cost £600
- •Employer matching: You contribute 5% (£150/month), employer matches 5% (£150/month) = £300/month total at cost of £120 to you (after tax relief)
Frequently Asked Questions
Related Terms
Annual Allowance
The maximum amount you can contribute to your pension each year and still receive tax relief (currently £60,000).
Carry Forward
The ability to use unused pension annual allowance from the previous three tax years to make larger pension contributions.
Auto-Enrolment
Automatic enrollment of eligible employees into a workplace pension scheme, with minimum contributions from both employer and employee.
Salary Sacrifice
An arrangement where you give up part of your salary in exchange for a non-cash benefit (e.g., extra pension), saving tax and NI.
Higher Rate Tax
Income Tax charged at 40% on income between £50,271 and £125,140 (2024/25).
Marginal Rate
The rate of tax you pay on your next pound of income, which can be higher than your effective rate due to allowance withdrawal.