Pension Tax Relief UK 2025/26: How Higher-Rate Relief Works, Salary Sacrifice and Carry Forward Explained

Pension tax relief means the government adds money to your pension based on the income tax you pay. You can receive tax relief on private pension contributions worth up to 100% of your annual earnings, subject to the annual allowance of £60,000 for the 2025/26 tax year.

There are two main ways you receive this relief, and understanding which applies to you is essential:

Relief at source is the most common method for personal pensions, stakeholder pensions and some workplace schemes. You contribute from your net (after-tax) pay, and your pension provider claims the basic 20% relief from HMRC and adds it directly to your pot. So if you want to put £1,000 into your pension, you only need to pay £800 — your provider claims the other £200. This happens automatically; you do not need to do anything.

Net pay arrangements are used by many workplace pension schemes, particularly in the public sector. Your employer deducts pension contributions from your gross pay before calculating income tax and National Insurance. You receive the full tax relief immediately through your pay, regardless of which tax band you are in. The downside is that non-taxpaye system managed by HMRC (gov.uk/tax-codes)rs and those earning below the personal allowance of £12,570 miss out on the 20% relief that relief-at-source schemes provide.

Even if you do not pay income tax, you can still contribute up to £2,880 net per year to a relief-at-source pension and receive £720 in tax relief from the government — giving you a total contribution of £3,600.

Here is where many people lose out. If you are in a relief-at-source scheme and you pay income tax at 40% or 45%, the pension provider only claims the first 20% of relief for you. The rest must be claimed through your Self Assessment tax return — and if you do not file one, you need to contact HMRC directly.

For the 2025/26 tax year in England, Wales and Northern Ireland, the income tax bands are:

• Personal Allowance: £0–£12,570 (0% tax)
• Basic rate: £12,571–£50,270 (20% tax)
• Higher rate: £50,271–£125,140 (40% tax)
• Additional rate: Over £125,140 (45% tax)

Consider a practical example from HMRC's own guidance: someone earning £60,270 in 2024/25 who pays £12,000 into a relief-at-source pension. The scheme claims 20% tax relief automatically. But £10,000 of that contribution falls within the higher-rate band — so the saver can claim an additional 20% relief on that £10,000 (worth £2,000) through Self Assessment. The remaining £2,000 of the contribution falls within the basic-rate band, so no further relief is available on that portion.

Scotland has different rates. Scottish taxpayers in the 2025/26 tax year face a starter rate of 19%, basic rate of 20%, intermediate rate of 21%, higher rate of 42%, advanced rate of 45% and top rate of 48%. If your pension uses relief at source, the provider still claims 20% — so Scottish taxpayers at the starter rate (19%) do not need to repay the 1% difference, while those at 42% or above must claim the additional relief through Self Assessment.

Related reading: See our pensions hub · Spring Statement 2026 · PensionBee Review

Salary sacrifice — sometimes called 'salary exchange' — is a powerful arrangement that can save you significantly more than standard pension contributions. Instead of you contributing to your pension from your net pay (and then claiming tax relief), you agree with your employer to reduce your contractual salary by a set amount, which your employer then pays directly into your pension.

The key advantage is that salary sacrifice reduces your gross pay before both income tax and National Insurance contributions (NICs) are calculated. With standard pension contributions, you save income tax but still pay NICs on the full salary. With salary sacrifice, you save both.

For a higher-rate taxpayer earning £60,000 who wants to contribute £500 per month to their pension:

• Standard contribution (relief at source): You pay £400, provider adds £100 tax relief, you claim £100 more via Self Assessment. Total NI paid on the £500: £10 (2% employee NIC above the upper earnings limit of £50,270). Your employer also pays 15% employer NIC.
• Salary sacrifice: Your salary drops by £500, your employer pays £500 plus their NIC saving directly into your pension. You save both your income tax and your NIC. Your employer saves 15% employer NIC — and good employers pass some or all of this saving into your pension pot as a bonus contribution.

There are important caveats. Reducing your contractual salary could affect your entitlement to certain benefits including statutory maternity pay, mortgage affordability assessments, and death-in-service benefits calculated as a multiple of salary. Always check with your employer's HR department before opting in. Salary sacrifice also cannot take your pay below the National Living Wage.

The annual allowance for 2025/26 is £60,000 — this is the maximum total pension savings in a tax year before you face an annual allowance charge. This includes all contributions to all your pension schemes: your own, your employer's, and any third-party contributions.

For defined contribution pensions, it is the total contributions paid in. For defined benefit pensions, it is the increase in the value of your benefits over the year (calculated using HMRC's formula, not simply the contributions).

Tapered annual allowance applies if you are a very high earner. For 2025/26, both of these conditions must be met: your 'threshold income' exceeds £200,000 and your 'adjusted income' exceeds £260,000. If they do, your annual allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. This means the taper fully bites at an adjusted income of £360,000.

Money Purchase Annual Allowance (MPAA) kicks in if you have flexibly accessed a defined contribution pension — for example, by taking an income from flexi-access drawdown or taking an uncrystallised funds pension lump sum. The MPAA reduces your annual allowance to just £10,000 for money purchase (defined contribution) contributions, though you can still contribute more to defined benefit schemes.

Carry forward is one of the most underused planning tools available. If you did not use your full annual allowance in any of the previous three tax years, you can carry the unused portion forward and add it to this year's allowance. For 2025/26, you can look back to 2022/23, 2023/24 and 2024/25. The annual allowance was £40,000 in 2022/23 and £60,000 in both 2023/24 and 2024/25 — so in theory, you could carry forward up to £160,000 of unused allowance on top of this year's £60,000, for a total of £220,000. You must use the current year's allowance first, then carry forward from the earliest available year.

This is particularly useful for the self-employed or anyone who has had a year of lower contributions. You must have been a member of a registered pension scheme in each year you want to carry forward from, though you do not need to have made contributions.

If you suspect you are missing out on pension tax relief, here is what to do:

Step 1: Check which type of scheme you are in. Ask your pension provider or employer whether your scheme operates on a relief-at-source or net pay basis. If it is net pay, you are already getting full relief through your payslip. If it is relief at source, the provider claims 20% — and you may need to claim the rest.

Step 2: Review your tax band. For 2025/26, if your taxable income is above £50,270 (England, Wales and Northern Ireland) or above £43,663 (Scotland, for the higher rate at 42%), you are a higher-rate taxpayer and likely have unclaimed relief.

Step 3: Claim via Self Assessment. If you already file a Self Assessment return, enter your pension contributions in the relevant section. HMRC will calculate your additional relief and either reduce your tax bill or issue a refund. If you do not file Self Assessment, you can write to HMRC or call them to claim — or you can register for Self Assessment specifically to make the claim.

Step 4: Consider salary sacrifice. If your employer offers it, the National Insurance savings make salary sacrifice almost always the better option for pension contributions — provided you understand the impact on your contractual salary.

Step 5: Review carry forward opportunities. Check your pension statements for the last three years. If your total contributions in any year fell below the annual allowance (£40,000 for 2022/23, £60,000 for 2023/24 and 2024/25), you may have unused allowance you can use this year — ideal for a one-off bonus or a windfall.

Remember that the tax year ends on 5 April 2026. Any unused annual allowance from 2022/23 will be lost after that date, so if you have the means to make additional contributions, acting before the deadline is sensible.

This article is for informational purposes only and does not constitute regulated financial advice. Pension rules and tax relief are subject to change. For personalised advice on your pension arrangements, consult a qualified financial adviser.

Sources: gov.uk pensions overview, MoneyHelper pension guidance.