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What is pension tax relief?

Pension tax relief is effectively a refund of Income Tax. The government pays it into your pension to encourage you to save for your retirement.

The way it works is that if you pay £100 into a pension, such as the Fidelity SIPP, the government adds an extra £25. Even if you don’t pay tax, you can get tax relief on payments of up to £2,880 each tax year, boosting them to £3,600. If you pay a higher rate of tax, you may be able to claim further relief through your tax return. If a relative or a friend makes payments into your pension, you’ll receive tax relief in the same way.

With contributions from an employer, money is usually deducted from your pay before any tax is taken. So if your company pays £100 into your pension, the difference in your salary will only be £80 for a basic rate taxpayer or £60 if you pay higher rate tax.

There is a limit to the contributions you can earn tax relief on – for most people this is either 100% of their taxable earnings or £40,000 each tax year, whichever is lower.

Rates of tax relief may be different for people who live in Scotland.

Find out more about pension tax relief.