The quick answer
- For most people, you can save up to £60,000 in a tax year across all pensions before extra tax applies. This limit is called the annual allowance and includes what you pay in, what your employer pays in, and the automatic top-up from basic-rate tax relief. (GOV.UK)
- You can usually carry forward unused allowance from the previous three tax years if you were a member of a UK-registered scheme in those years. (GOV.UK)
- If you flexibly take taxable income from a defined contribution pension, your future money purchase annual allowance limits what you can pay in with tax relief to £10,000 a year. Plan the first withdrawal carefully. (GOV.UK)
How tax relief works “on the way in”
- Personal contributions and the 100% earnings rule. You get tax relief on personal payments up to 100% of your UK earnings each tax year (subject to the annual allowance). If you have no earnings, you can still pay £2,880 and the government tops it up to £3,600. (GOV.UK)
- Two common ways you get the relief:
- Relief at source (typical for personal pensions). You pay a net amount; your provider adds 20% and claims it from HMRC. If you pay higher-rate or additional-rate tax, you claim the extra via Self Assessment. (GOV.UK)
- Net pay (common in workplace schemes). Your contribution is taken before tax, so you automatically get relief at your full tax rate through payroll. (LITRG)
- Salary sacrifice (also called salary exchange). You give up part of your salary; your employer pays it into your pension. This reduces Income Tax and National Insurance for you and saves National Insurance for your employer (many employers share some of that saving with you). Your cash pay must not drop below the National Minimum Wage. (GOV.UK)
- Employer contributions. These are not restricted by your personal earnings, but they do count toward your annual allowance. For the employer to get corporation tax relief, payments must be “wholly and exclusively” for the business. (GOV.UK)
How your pension grows
- Growth inside a registered pension is tax-free. Investment income and capital gains within the pension are exempt from UK Income Tax and Capital Gains Tax. You’re normally taxed only when you take money out. (GOV.UK)
Taking money out — keep the tax down
- Tax-free cash. You can usually take up to 25% from each pension pot tax-free, but across your lifetime the total tax-free lump sums you take are capped by your lump sum allowance (normally £268,275). Above that, amounts are taxable as income. (The minimum access age is 55, rising to 57 from April 2028.) (GOV.UK)
- Use your tax bands. After taking tax-free cash, plan withdrawals to use your Personal Allowance and lower tax bands each year. If you have a partner, coordinate to keep household tax lower. (Rates and bands can change each Budget — check the current year before acting.)
- Avoid shrinking your future allowance by accident.
- If you take taxable income from a defined contribution pension (for example, regular drawdown payments or a taxable cash lump sum taken directly from the pot), your money purchase annual allowance becomes £10,000 for future defined contribution payments. (GOV.UK)
- Small-pot cash-ins (a pot of £10,000 or less, within HMRC limits) do not trigger the money purchase annual allowance — useful if you need cash but want to keep the option to pay in more later. (GOV.UK)
Carry forward — how to “super-size” one year
- Use this year’s annual allowance (normally £60,000, or lower if you have a high income or you have triggered the money purchase annual allowance). (GOV.UK)
- Add unused allowance from the previous three tax years, using the oldest year first. (GOV.UK)
- Remember the earnings rule for personal payments (up to 100% of your current-year earnings). Employer payments are not limited by your earnings, but all contributions still count toward this year’s annual allowance. (GOV.UK)
High-income pitfalls (read this twice)
- If your threshold income is over £200,000 and your adjusted income is over £260,000, your annual allowance reduces for that year. It tapers down by £1 for every £2 of adjusted income above £260,000, to a minimum of £10,000. (GOV.UK)
Simple, real-world examples
- Basic-rate taxpayer adds £8,000. You pay £8,000; your provider adds £2,000; £10,000 lands in your pension. (Counts toward your £60,000 annual allowance.) (GOV.UK)
- Higher-rate taxpayer adds £8,000. Same as above, plus you claim extra relief via Self Assessment to reflect your higher tax rate. (GOV.UK)
- Salary sacrifice £5,000. You give up £5,000 of salary; employer pays that into your pension. You save Income Tax and National Insurance; your employer saves National Insurance (some share it with you). Net cost to you is lower than paying £5,000 personally. (GOV.UK)
- Tax-free cash at retirement. Suppose you have a £400,000 pot. You can usually take £100,000 tax-free (25%), but remember your lifetime cap on tax-free lump sums is £268,275 across all pensions. The rest you draw is taxed as income when you take it. (GOV.UK)
Your smart next steps
- Grab your full employer match first — it’s a guaranteed return.
- Consider salary sacrifice if your employer offers it (and if it won’t push your pay below the National Minimum Wage). (GOV.UK)
- Map your carry forward before 5 April so you know your true headroom. (GOV.UK)
- Plan withdrawals to fill lower tax bands and preserve future paying-in room.
- Check the current-year rules each April and after Budgets — limits can change.
Important
This is education, not personal advice. Pension and tax rules change, and what’s best depends on your situation. If in doubt, speak to a regulated adviser.
Key official sources: HMRC guidance on pension tax relief, annual allowance and carry forward; rules on salary sacrifice; small-pot cash-ins; abolition of the lifetime allowance and the new lump-sum limits; tax-free growth inside pensions. (GOV.UK)
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