With life becoming ever more expensive we are all encouraged to pay into a pension to better secure our financial future. Another benefit is that it can be an extremely efficient tax planning strategy both as an individual or through your company. In this post we take a look at how the land lies with regards to pension contributions and tax relief when you are paying into one.

How much can I pay into my pension each year?
Personal contributions are allowed to be the higher of £3,600 or your “relevant income”. Relevant income includes:
- Employment income (including taxable benefits)
- Trading income from self-employment or partnerships
- Profits from a Furnished Holiday Lets (these will only exist until 5 April 2025)
Whether it is the £3,600 or your relevant income that has set the limit for you, it is important to remember that for personal contributions your pension company will reclaim basic rate tax of 20% from HMRC and add it to the contribution to gross it up. To allow for this you need to multiply your limit by 80% to get the amount you personally can make as payments. For example, with the £3,600 you would contribute £2,880 (£3,600 x 80%) and HMRC would pay the pension company £720 (£3,600 x 20%).
Does all the tax relief go into the pension?
If you are a basic rate taxpayer then yes, the fact the pension company has reclaimed the 20% and added it to your pension pot means there is no more relief to be had as you only paid income tax at the 20% rate. However, if you are a higher rate taxpayer and making either net pay contributions through your employer (paying the contribution from your net pay after tax) or directly to the pension scheme yourself, you are entitled to another 20% relief for all the contributions made before you fall back into basic rate.
So for example, if you are earning £60,000 and pay £15,000 into a pension from your net pay, then you are entitled to a further 20% tax relief on £9,730 of contributions (being £60,000 less the current basic rate threshold of £50,270). Rather than go into the pension pot, this extra 20% relief will be refunded to you personally. To receive this you can either complete a self-assessment tax return or write to HMRC to claim.
My pension contributions are made via salary sacrifice – what does that mean?
If you are paying into a workplace pension via salary sacrifice it means you are giving up (“sacrificing”) a portion of your salary in return for your employer paying it to the pension company on your behalf alongside their contribution. What this means is that the pension payment has come off your gross salary before it is taxed. In these circumstances the pension company cannot reclaim 20% from HMRC as the contribution was never subject to tax. This means that even if you are a higher rate taxpayer there is no more tax relief to be claimed. As well as providing full automatic tax relief, salary sacrifice pensions can be particularly useful for those earning over £100,000 and paying effective tax rates of 60%.
My salary is low as I own a company and mainly get paid dividends. What can I do about pension contributions?
In these situations relevant income will be limited to the low salary, which typically is between £9,000 and £12,570 depending on circumstances. However, the relevant income rule only applies to personal pension contributions – the same rule does not apply to contributions the company makes on your behalf. You can therefore have a pension in place which the company pays into on your behalf without the need for you to make any personal contributions. These amounts paid in by the company are not inflated by any HMRC reclaim by the pension company, but the company will save corporation tax on the contribution.
What is the annual limit for paying into a pension?
This was raised on 6 April 2023 to £60,000 per tax year (gross contributions so including any basic rate reclaims by the pension company). This £60,000 limit applies to both personal pension schemes and company schemes. The limit of £60,000 can be reduced for particularly high earners who have income over £200,000 a year or have adjusted income (earnings plus all pension contributions made) of over £260,000.
If you have not used all your annual allowance from previous years then you can go back to the three previous tax years and add any unused allowance from those to your current year allowance.
Personal circumstances vary and therefore we would always advocate speaking to a Financial Advisor who will be able to tell you how much you have available as a maximum contribution in any tax year.
Pensions can be a very tax efficient way of saving for the future, both at the time of contributing and when drawing down at retirement. As detailed above there are a number of rules to bear in mind to ensure you maximise this efficiency and don’t fall into any traps. At Veritons we don’t just process the numbers – we review your position and ensure that any opportunities, such as pension contributions, are discussed in good time. If this sounds like something you could benefit from, hit the button below and contact us for your free initial discovery meeting.