Most people know the importance of saving for retirement. The tax relief on pensions is designed to encourage us to save more.
The government encourages us to save for our retirement; auto-enrolment makes it easy for employees to join pension schemes, and contributions are very tax-efficient. The introduction of lifetime individual savings accounts in 2017 was an additional tool to encourage us to save for the future.

Tax-Free Growth

Any funds held in your pension can grow tax-free – with no tax on income or capital profits. This taxfree compound growth can be very powerful over the long term.
Tax-free lump sum
When you access your pension in retirement, you can receive 25% tax-free – either 25% of any lump sum withdrawals, or of regular payments.

This is, however, effectively a cap of £268,275 that can be taken tax-free.
Contributions: Employees In most cases, contributions made by an employer to an employee’s pension scheme are not taxed on the employee. This also extends to salary sacrifice, where an employee gives up some salary (or bonus) in exchange for a larger employer pension contribution.
Currently, this also saves the employee and the employer National Insurance contributions (NICs), although, as announced in Autumn Budget 2025, from 6 April 2029, there will be a cap of £2,000 on salary sacrifice contributions that save NICs.

Contributions: Self-Employed and Individuals

If you make a personal contribution, this is treated as being paid net of 20% tax, which the pension scheme can recover from HMRC. Suppose you contribute £800; the pension provider claims back £200, giving you £1,000 in your pension.

For higher (40%) and additional rate (45%) taxpayers, further tax can be claimed back from HMRC so that you obtain the full tax relief. This is usually done via the self-assessment tax return or by adjusting your PAYE code.

Annual Caps

The maximum you can contribute is usually 100% of your earnings, capped at £60,000 per tax year. If you do not use the full allowance, you can carry it forward for three tax years. This carry forward is particularly useful for higher earners; the £60,000 allowance tapers down when your income exceeds £260,000 (reducing £1 for every £2 of additional income) until it reaches £10,000. The carry forward allows contributions to continue at higher levels until the carry forward is used up.

Pensions for Children

Getting started early can be very beneficial when investing. Many parents and grandparents could consider making contributions to pensions for their children, grandchildren or other family members.

While normally contributions are capped at one’s annual earnings, there is a de-minimis of £3,600 per year, which will still attract tax relief (i.e., a contribution of £2,880 by a parent would be topped up with £720 tax relief).

So, a parent paying, say, to an adult child’s pension scheme would still attract tax relief even if they are not working. And if they are working, the child is also entitled to recover the 40% and 45% relief (see above) even if the contributions were made by someone else.

Inheritance Tax

Currently, a further tax efficiency is that pension savings are not included in your estate for inheritance tax (IHT) purposes. This is a great way of passing on wealth tax-free and setting up beneficiaries for their own retirements. However, as has been widely reported, from 6 April 2027, this will change and the entire amount remaining in your pension will be included.

Practical Tip

Pension saving is very tax-efficient, but make sure you make the most of it. Do not forget to recover your additional tax relief if you are a 40% or 45% taxpayer. For parents or grandparents, regular contributions to a loved one’s pension are tax-efficient for them and could be combined with a ‘regular gifts out of income’ strategy to save IHT, too.