Pension tax relief explained (2026/27)

Relief at source vs net pay

Neither method saves National Insurance. Salary sacrifice does, because you give up salary in exchange for an employer contribution; from April 2029 NI savings are due to be limited to the first £2,000 a year sacrificed.

Claiming higher-rate relief

For relief at source, a £8,000 personal contribution becomes £10,000 in the pension. A higher-rate taxpayer can claim another £2,000 (20% of the gross), and an additional-rate taxpayer £2,500. This works by extending your basic rate band by the gross contribution. Claim on your Self Assessment return, or if you do not file, ask HMRC to adjust your tax code. You can backdate claims for 4 tax years.

• Scottish taxpayers: providers claim 20%; claim extra relief at 21%, 42%, 45% or 48% depending on your band.
• Contributions also reduce adjusted net income, which can restore a personal allowance lost between £100,000 and £125,140 (an effective 60% relief) or reduce the High Income Child Benefit Charge.

Annual allowance

Total contributions (yours, your employer's and tax relief) of up to £60,000 a year get relief, limited for personal contributions to 100% of your relevant UK earnings. You can carry forward unused allowance from the previous 3 years if you were a member of a registered scheme.

• Tapered annual allowance: if threshold income exceeds £200,000 and adjusted income exceeds £260,000, the allowance falls by £1 for every £2, to a minimum of £10,000.
• Money purchase annual allowance: £10,000 once you have flexibly accessed a defined contribution pot (for example taken taxable income via drawdown or an UFPLS).
• Excess contributions trigger an annual allowance charge at your marginal rate, which can be paid by the scheme ("scheme pays") if over £2,000.

25% tax-free cash and the lump sum allowance

From age 55 (57 from 6 April 2028), you can usually take 25% of your pension tax-free, either upfront or as 25% of each withdrawal. Since the lifetime allowance was abolished in April 2024, total tax-free lump sums are capped by the lump sum allowance of £268,275 (higher if you hold protection), and lump sums plus serious ill-health and death benefits by the lump sum and death benefit allowance of £1,073,100. The rest is taxed as income.

Emergency tax on your first withdrawal

Pension providers usually tax the first flexible withdrawal using an emergency code on a Month 1 basis, as if you will receive the same amount every month.

• Example: £40,000 UFPLS with no other income in 2026/27. £10,000 is tax-free; £30,000 is taxable.
• Month 1 deduction: £11,931.25 (only one-twelfth of the personal allowance and bands are given, so much falls at 40% and 45%).
• Correct tax for the year: (£30,000 - £12,570) x 20% = £3,486.
• Overpaid: £8,445.25.

Reclaiming overpaid pension tax

From 6 April 2027 unused pension funds will usually be included in your estate for Inheritance Tax, which may change whether to spend pension or other savings first.

• P55: you took part of a pot and will not take more this tax year.
• P53Z: you emptied a pot and have other taxable income.
• P50Z: you emptied a pot and have no other income (and no PAYE income) this tax year.
• Otherwise HMRC adjusts automatically at the end of the tax year. Claiming typically gets the money back within 30 days.

Carry forward: paying in more than £60,000

If you have unused annual allowance from the previous 3 tax years, you can add it to this year's allowance. The maximum possible contribution in 2026/27 is £240,000.

You must use the current year's £60,000 first, then the oldest year's unused allowance, and you must have been a member of a registered pension scheme in each year you carry forward from. Personal contributions still only get tax relief up to 100% of your UK earnings for the year, so large carry-forward contributions are usually made by an employer, often your own company.

Example: a director who paid nothing in for the previous 3 years can have their company pay £240,000 in 2026/27, deductible for Corporation Tax if it meets the "wholly and exclusively" test.

Self-employed and non-earners

Sole traders get pension relief through relief at source, the same as employees in personal pensions. They pay 80% and the provider adds 20%. Higher-rate relief is claimed on the tax return. There is no NI saving, because Class 4 NI is charged on profits before pension contributions.

Tax on income after the 25%

Beyond the tax-free part, pension income is taxed like wages at your marginal rate, through a PAYE tax code on the pension. Drawing large amounts in one tax year can push income into higher bands.

Example: someone with the full new State Pension (about £12,548 a year) who takes £45,000 of taxable drawdown in one year has total income of about £57,548, so roughly £7,278 is taxed at 40%. Spreading the same £45,000 over two tax years keeps every pound in the 20% band, saving about £1,456. In Scotland, Scottish rates apply to pension income.