Guide
Pension tax relief: the three methods
The same 5% pension contribution can leave three employees with three different amounts of take-home pay, depending purely on how their employer administers the scheme. This guide explains relief at source, net pay arrangements and salary sacrifice, shows who wins under each, and covers the higher-rate relief that millions of people never claim.
The principle
Pension contributions are relieved from income tax at your marginal rate. Put £100 into a pension as a basic-rate taxpayer and it should cost you £80. As a higher-rate taxpayer it should cost £60. The three methods all aim for that outcome but arrive by different routes, and the routes are not equivalent - one of them also removes National Insurance, and one of them leaves part of the relief unclaimed unless you go and ask for it.
1. Relief at source
Your contribution is taken from pay that has already been taxed. The pension provider then reclaims 20% from HMRC and adds it to your pot. To get £100 into the pension you hand over £80 and the provider claims the other £20. This is how most personal pensions, SIPPs and many group personal pension schemes work.
Who wins: anyone earning below the personal allowance. A part-time worker on £11,000 pays no income tax at all, yet still gets 20% added to every contribution. That is free money that a net pay scheme would not provide.
Who loses: higher and additional-rate taxpayers who never claim the rest. The provider only ever reclaims 20%. The further 20 or 25 percentage points must be claimed from HMRC, and a very large number of people simply do not. On £6,000 of contributions a higher-rate taxpayer is leaving £1,500 a year unclaimed.
2. Net pay arrangement
The contribution is deducted from your pay before income tax is calculated, so your taxable pay is lower and you never pay tax on the money in the first place. There is nothing to reclaim, at any rate. A higher-rate taxpayer gets 40% relief immediately through payroll, and an additional-rate taxpayer gets 45%.
Who wins: higher and additional-rate taxpayers, who get full relief without touching a tax return.
Who loses: employees earning below the personal allowance. There is no tax to relieve, so they get nothing on top of their contribution - the reverse of the relief-at-source position. This is the well known net pay anomaly, and it hits exactly the lowest-paid members of workplace schemes.
Neither relief at source nor net pay saves any National Insurance. The money is still treated as your earnings, so the 8% or 2% employee contribution is charged in full.
3. Salary sacrifice
You give up contractual gross pay and the employer pays the equivalent into your pension. Because the money is never your earnings, it escapes both income tax and National Insurance, and the employer escapes its 15% secondary contribution as well.
Who wins: almost every employee above the National Insurance primary threshold, and every employer. It is the only method that beats the 8% employee National Insurance charge.
Who loses: people near the minimum wage, where a sacrifice is blocked by the £12.71 hourly floor, and people whose statutory maternity or sick pay would fall as a result. The trade-offs are set out in salary sacrifice explained.
The three methods side by side
A basic-rate employee on £40,000 contributing 5%, which is £2,000 gross into the pension either way.
| Method | Income tax saved | NI saved | Net cost of £2,000 |
|---|---|---|---|
| Relief at source | £400 | £0 | £1,600 |
| Net pay | £400 | £0 | £1,600 |
| Salary sacrifice | £400 | £160 | £1,440 |
Salary sacrifice is £160 a year better for the same pension outcome, purely from the 8% National Insurance. For a higher-rate employee contributing £8,000 the gap is smaller in percentage terms, at 2%, but the employer saving of £1,200 is often shared back into the pension, which widens it again.
Claiming higher-rate relief
If you are in a relief-at-source scheme and pay tax above the basic rate, the extra relief is yours but you have to ask.
- Work out the gross contribution for the year. If you paid £4,000 from net pay, the gross figure is £5,000 once the provider has added basic-rate relief.
- If you file a Self Assessment return, enter the gross figure in the pension contributions section. HMRC extends your basic rate band by that amount.
- If you do not file a return, contact HMRC with the figures. Relief is usually given by adjusting your tax code, which spreads the benefit across the rest of the year.
- Check earlier years too. Claims for past tax years are generally allowed for up to four years after the end of the year concerned.
One important extra: gross personal contributions reduce your adjusted net income, which is the figure used for the personal allowance taper and the high income child benefit charge. That works under all three methods, and it is why the personal allowance taper can often be escaped without changing employer arrangements at all.
The limits that apply to all three
Relief is only available on contributions up to 100% of your relevant UK earnings, or £3,600 gross if you earn less than that. The pension annual allowance caps the total that can be paid in each year without a charge, and it is reduced for very high earners under the tapered annual allowance. Unused allowance from the previous three years can sometimes be carried forward. If you are contributing at a level where these limits are in play, take proper advice before making a large one-off payment.
Compare them yourself
The take-home pay calculator has a pension method switch covering all three arrangements. Enter your salary and contribution percentage, then flip between methods to see exactly what each one does to your take-home pay, your National Insurance and your marginal rate.
Common questions
Which pension method is best?
Salary sacrifice is best for most employees because it is the only method that saves National Insurance as well as income tax. Between net pay and relief at source, net pay is better for higher-rate taxpayers because full relief is automatic, while relief at source is better for very low earners who pay no tax at all, because they still get 20% added to their contribution.
How do I know which method my employer uses?
Compare your payslip figures. Under salary sacrifice your gross pay itself is reduced and there is often a separate employer contribution line. Under net pay the pension deduction appears before tax is calculated, so your taxable gross is lower than your gross. Under relief at source the deduction comes out after tax and your taxable gross equals your gross. If it is unclear, ask payroll which arrangement the scheme uses.
Do I have to claim higher-rate pension relief myself?
Under relief at source, yes. Your provider only reclaims basic rate relief, so the extra 20 or 25 percentage points must be claimed from HMRC through Self Assessment or by contacting them directly. Under net pay and salary sacrifice the full relief is given automatically through payroll and there is nothing to claim.
Can I claim back missed higher-rate relief from earlier years?
Claims for earlier tax years are generally allowed for up to four years after the end of the tax year concerned. If you have been a higher-rate taxpayer in a relief-at-source scheme and never claimed, it is worth checking whether several years can be reclaimed at once.
Written for the 2026/27 tax year. This is general information, not personal financial or tax advice. Pension decisions depend on your circumstances, including the annual allowance, the tapered annual allowance for high earners and your own scheme rules.