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Pension tax relief and the allowances that cap it

How relief actually works, the £60,000 annual allowance and carry forward, the taper and MPAA traps — and the refund higher-rate taxpayers forget to claim.

The deal, plainly

Pension contributions come out of pre-tax income: put £100 into a pension and the tax you’d have paid on that £100 goes in too. For a basic-rate taxpayer, £100 in the pension costs £80; for a higher-rate taxpayer, £60; for an additional-rate taxpayer, £55. On the way out, 25% is tax-free and the rest is taxed as income — usually at a lower rate than the relief you received, because retirement income tends to sit in lower bands. That gap, plus the employer match and NI savings covered in the workplace pension guide, is why pensions beat almost everything for long-term saving despite the access restrictions.

How the relief actually arrives — check yours

Quirk worth knowing: relief at source slightly favours non-taxpayers (they still get the 25% top-up on up to £2,880 a year), while net pay schemes give low earners under the personal allowance no relief at all.

The annual allowance: £60,000, with a stretch

Total pension contributions — yours, your employer’s, and the tax relief — are capped at £60,000 a year (and your own contributions also can’t exceed your earnings, or £3,600 gross if you earn less). Breach it and a tax charge claws the relief back.

Carry forward softens the cap: unused allowance from the three previous tax years can be added on top, provided you were a member of any pension scheme in those years and have the earnings to cover the total. A bonus year, an inheritance directed pension-ward, or a business owner’s catch-up contribution can legitimately reach £150,000+ in a single year this way. Use oldest years first; keep records.

The two traps

The taper (high earners). Above £200,000 of “threshold income”, if your “adjusted income” (roughly: total income plus employer pension contributions) exceeds £260,000, the annual allowance shrinks by £1 for every £2 over — bottoming out at £10,000 at £360,000+. The definitions are fiddly and the penalty for guessing is real; this is the zone where paying for advice pays for itself.

The MPAA (anyone dipping in early). Flexibly access any taxable pension money — even £1 beyond the tax-free cash — and the Money Purchase Annual Allowance cuts your allowance for money-purchase contributions to £10,000 a year, permanently, with no carry forward. It exists to stop recycling salary through a pension, but it routinely ambushes people who raid a pension at 55 and then keep working. Taking only tax-free cash doesn’t trigger it; see the drawdown guide before touching anything.

The £100,000 cliff — relief at 60%+

Between £100,000 and £125,140 of income, the personal allowance is withdrawn at £1 per £2 — an effective 60% marginal tax rate (62% with NI). A pension contribution that pulls income back below £100,000 gets relief at that effective rate, and can also restore free childcare hours and tax-free childcare eligibility, which are cliff-edged at £100,000. Pound for pound, this is the most powerfully-relieved pension contribution in the UK system. The Marginal Tax & Take-Home Calculator shows exactly where you stand and what a contribution back below £100,000 is worth.

The one-line summary

Know which relief mechanism your scheme uses and claim the higher-rate slice if it isn’t automatic, stay inside £60,000 (stretching it with carry forward when needed), and treat the taper, the MPAA and the £100,000 cliff as the three places where an hour of planning is worth thousands.

Last reviewed: July 2026.