Pension contribution relief
Finance Act 2025 · 2025/26
1 Schemes, relevant earnings and limits
In this TX lecture: Unused annual allowance carry-forward, tapered annual allowance, annual-allowance excess charges and receiving pension income are not examined in FTX.
2 Types of pension scheme
There are tax advantages associated with pension scheme investments. A registered pension scheme is a long-term savings plan for retirement with special tax privileges.
the individuals who invest are entitled to tax relief for the contributions they make into the scheme limited to the higher of (gross amounts):
the relevant earnings of the taxpayer, being employment income and/or trading profits, or
£3,600
An employer who contributes into a pension scheme on behalf of their employees can deduct those contributions from their trading profits. These contributions are an exempt benefit for the employees.
2.1 Personal Pension Scheme
Run by financial institutions - an insurance company or a bank
available to the employed, self employed or unemployed individuals
if the individual is an employee, contributions can be made by the employee and/or the employer
2.2 Occupational Pension Scheme
Set up by the employer for the benefit of employees
contributions can be made by the employee and/or the employer
Relevant earnings are employment earnings and taxable trading profits. Property, savings and dividend income are not relevant earnings for this limit.
Personal tax-relieved gross contributions are limited to the higher of £3,600 or 100% of relevant earnings, subject to the scheme conditions. A person without earnings can normally pay £2,880 net for £3,600 gross relief.
The annual allowance for 2025/26 is £60,000 and considers total pension inputs, including employer contributions. FTX requires awareness of this limit, not excess-charge, carry-forward or taper computations.
3 Tax relief
Regardless of the type of scheme the amount of tax relief available for the contributions is the same, but depending on the type of scheme. The method of obtaining the relief is different.
When an individual contributes into a personal pension scheme, then as we saw in chapter 2, no such deductions are made from income in the Income Tax computation, instead tax relief is given as follows:
basic rate tax relief is given at source on the lower of:
gross contributions paid
maximum annual amount - the higher of £3,600 or 100% of relevant earnings
This means that if a taxpayer pays £8,000 into his personal pension scheme, this is net of basic rate tax at 20%. HMRC will then pay the pension provider an amount equivalent to the basic rate deduction (20/80 x £8,000= £2,000). Thus the individual’s pension fund is increased by £10,000 in total. As the gross contribution exceeds £3,600 (see note above) then the taxpayer must have relevant earnings for the tax year of at least £10,000 for tax relief to be fully available.
Higher rate and additional rate taxpayers achieve higher and additional rate relief by extending the basic and higher rate bands by the gross amount of the personal pension contribution (in the same way as gift aid donations*).
When an employee makes a contribution into an occupational scheme tax relief is given at source under the “net pay arrangement”. The employer will deduct the gross contribution from the individual’s employment income before computing the tax to be deducted under PAYE.
If an employee has a gross annual salary of £25,000 and wants to contribute £1,200 into his occupational pension scheme, The employer, over the tax year, will pay £1,200 into the pension scheme on the employee's behalf and put a (net pay) salary of £23,800 through PAYE.
This would be presented in the calculation of employment income in the Income Tax computation as a salary of £25,000 less employee's occupational pension contribution of £1,200.
Gross personal contributions also reduce adjusted net income for the personal allowance. Occupational net-pay contributions reduce employment income first; do not give band-extension relief again for the same payment.
4 Employer contributions
The employer’s contribution is an exempt employee benefit and is normally deducted from the employer’s trading profits on a paid basis. It is not deducted again from the employee’s taxable income. Include it in total pension inputs when identifying annual-allowance usage.
Haruto has salary £60,000 and pays £4,000 net to a personal pension. Compute the gross contribution and income-tax liability for 2025/26.
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Imran earns £36,000 and contributes £3,000 gross under an occupational net-pay arrangement. Employer contributes £2,000. Calculate employment income and identify pension inputs.
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A stakeholder pension is a form of personal pension. The same relevant-earnings limit and relief-at-source method apply to the individual. Employees, employers and the self-employed can contribute under the relevant scheme rules; the £60,000 annual allowance considers their combined pension inputs.