Relief at source or net pay: how your pension gets tax relief

Pension tax relief is the government's contribution to your retirement saving, and there are generally two ways you may get it: relief at source and net pay¹. The method your scheme uses decides how the money reaches your pot, whether you have to claim anything yourself, and, for some people, whether you get relief at all.

Under relief at source, your contribution is taken from pay after income tax and National Insurance have been deducted, and your pension provider then claims tax back from the government at the basic rate of 20 per cent². Under a net pay arrangement, your employer takes your pension contribution and the government's contribution as tax relief from your pay before deducting tax, and you pay tax on what is left².

The difference matters most to two groups. People who pay little or no income tax get relief in a relief at source scheme but not under net pay³. Higher and additional rate taxpayers in a relief at source scheme get only the basic 20% automatically and must claim the rest themselves⁴.

Two ways a pension gets tax relief

The two methods reach the same destination by different routes, and the route changes what you see on your payslip.

With relief at source, contributions are taken from your after-tax pay. The pension provider takes 80% from your salary and claims 20% of the amount you have contributed from the government³. Your employer deducts the contribution after tax and National Insurance, and the scheme provider then claims the tax back from the government at the basic rate of 20 per cent². You can tell a scheme is relief at source if the pension provider has to claim the tax relief from HMRC⁴.

With net pay, contributions are deducted from your gross pay before any tax is applied⁷. Your employer takes your pension contribution and the government's contribution as tax relief from your pay before deducting tax, and you pay tax on what is left². Because the contribution is taken from gross pay before tax is calculated, the member automatically receives full tax relief⁷. In practice this means you get full tax relief at your highest marginal rate of income tax without doing anything¹.

The practical difference is timing and visibility. Under net pay, your taxable pay is lower, so the benefit shows up as less tax deducted. Under relief at source, your take-home pay reflects the full contribution, and the government's share appears later in the pension itself.

Relief at source: £25 added for every £100 you pay in

The arithmetic of relief at source is simple once you see it as a gross figure. For basic rate taxpayers, for every £80 you contribute, you receive an additional £20 into your pot from the government⁹. Put another way, for every 80 pence that you contribute, 100 pence is actually invested in your pension scheme¹⁰.

The mechanism is a grossing-up. The investor pays a net contribution, for example £80, and the scheme administrator grosses up the contribution to £100 by claiming 20% tax relief from HMRC⁷. The pension provider then adds basic rate tax relief, currently 20%, to members' pension pots¹¹.

A worked example from official guidance makes it concrete. Jane's monthly pension contribution figure on her payslip is £80, which is just her contribution; her provider claims £20 from the government, totalling £100 a month paid into a relief at source scheme².

Net pay: contributions taken before income tax

Under a net pay arrangement, contributions are deducted from your gross pay before any tax is applied⁷. Your employer contributes to your pension scheme from your pay before tax is deducted¹². Because the contribution is taken from gross pay before tax is calculated, the member automatically receives full tax relief⁷, and this is generally at the highest marginal rate of income tax the member pays¹.

The advantage is that nothing needs claiming. A net pay arrangement scheme means you get all your tax relief automatically¹³. For a higher rate taxpayer, that is the full 40%; for an additional rate taxpayer, 45%¹⁴.

The catch is at the bottom of the income scale. Under this arrangement, if you do not pay tax, you do not get tax relief, for example because you earn less than the tax threshold². You will not benefit from tax relief using this method if you do not pay UK income tax or your earnings are below the personal allowance¹. Members get full tax relief unless they do not pay tax, for example because, after allowances, they earn less than the starting rate for income tax¹¹.

Which schemes use which method

The type of scheme you are in usually tells you which method applies, though not always.

Personal pensions generally use relief at source. For a personal pension scheme, tax relief is generally given using the relief at source method¹. Group personal pension plans and group stakeholder pensions also use relief at source¹⁵.

Occupational pension schemes, including auto enrolment and defined benefit schemes, typically operate on a net pay arrangement basis⁷. Workplace pensions often operate a net pay scheme, meaning your employer deducts your pension payments from your gross pay¹⁶.

If you are unsure, the quickest check is your payslip and your scheme's own paperwork. A scheme is relief at source if the pension provider has to claim the tax relief from HMRC⁴. If your contribution reduces your taxable pay before tax is worked out, it is net pay.

Higher and additional-rate taxpayers: claiming the extra relief

Relief at source gives 20% upfront; higher and additional rate relief must be claimed separately⁷. If you pay income tax at a higher rate than 20%, you will need to claim the extra tax relief yourself¹⁷.

The claim goes through Self Assessment. If you are a higher or additional rate taxpayer, to get full tax relief you need to claim back tax on your annual tax return². Higher and additional rate taxpayers in relief at source schemes must claim back extra tax relief through self-assessment¹⁸. You can claim extra relief directly from HMRC, which will either send it to you or adjust your tax code¹⁹.

The amounts are worth knowing. A higher rate taxpayer may need to proactively claim the extra 20% tax relief they are entitled to, and an additional rate taxpayer the extra 25%²⁰. The government adds tax relief at your highest rate of income tax: 20% for basic rate, 40% for higher rate and 45% for additional rate¹⁴. In practice, a £100 contribution effectively costs a higher rate taxpayer £60⁵.

Non-taxpayers and low earners: where the two methods differ

This is where the choice of method has its sharpest effect. If you have little or no earnings and are in a relief at source scheme, you will still get tax relief²¹. If you do not pay income tax because you are on a low income, you automatically get tax relief².

Under net pay, the opposite applies. If you do not pay tax, you do not get tax relief, for example because you earn less than the tax threshold². You will not benefit from tax relief using this method if you do not pay UK income tax or your earnings are below the personal allowance¹.

The policy effect has been documented. People whose income is below the personal allowance are not as well off overall if their employer uses a net pay scheme rather than a relief at source scheme²². Reporting has described the lowest paid seeing no benefit because they do not earn enough to pay income tax²³.

There is a limit on how much relief a non-taxpayer can get. You can get tax relief on pension contributions up to 100% of your earnings, or £3,600 if your earnings are lower⁵. If you have no earnings, the annual cap is £3,600²⁴. If you have no earnings you can still get tax relief on gross contributions up to £3,600, and this also applies if you earn less than that²⁵. If you do not pay tax, you can still get tax relief on your own or someone else's contributions up to a certain limit²⁶.

Scottish and Welsh taxpayers get relief at their own rates

Income tax rates in Scotland are different, which affects how much additional pension tax relief higher earners can reclaim²⁷. While basic rate tax relief happens automatically at 20% for everyone, if you are a Scottish or Welsh taxpayer, the marginal relief you are entitled to is at the Scottish or Welsh rate of income tax¹⁶.

For Scottish taxpayers the extra amounts are specific. In Scotland, you can claim an extra £1.58 for every £100 paid if you pay enough tax at the Scottish Intermediate Rate of 21%²⁷. You may also be able to claim a further £26.58 if you pay enough tax at the Scottish Higher Rate of 42%²⁷. Higher, advanced and top rate taxpayers in Scotland qualify for pension tax relief at 42%, 45% or 48% respectively²⁸.

Welsh taxpayers have their own rates, and the relief at source figures are published. Welsh Income Tax outturn statistics for 2024 to 2025 show relief at source of -£108 million²⁹.

The practical point is the same in both nations: the automatic top-up is 20%, and anything above that has to be claimed. There is more on the Scottish position on pension tax relief for Scottish taxpayers.

Limits on the relief you can get

Relief is generous but capped, and the caps come from several directions.

The earnings limit is the first. You can get tax relief on what you pay in, up to 100 per cent of your earnings, as long as you are under 75². Tax relief is available on contributions up to 100% of your annual earnings³⁰. If you are resident in the UK for tax purposes and under the age of 75, you can get tax relief on pension contributions²⁷.

The annual allowance is the second. Relief is worth up to the annual allowance of £60,000 a year or 100% of your earnings, whichever is lower³¹. You can contribute up to £60,000 a year, or your total earnings if lower, and still receive tax relief²⁴. You can also carry forward unused allowance from the previous three tax years²⁴.

The non-earner cap is the third. You can get tax relief on pension contributions up to 100% of your earnings, or £3,600 if your earnings are lower⁵. If you have no earnings, the annual cap is £3,600²⁴.

Salary sacrifice is a different arrangement

Salary sacrifice is not a third tax relief method; it is a way of paying in. Salary sacrifice is when you agree to reduce your gross salary or sacrifice a bonus and, in return, your employer pays the same amount into your pension³². You give up part of your salary and your employer pays this straight into your pension³³. In some cases, this will mean you and your employer pay less tax and National Insurance³³.

It does not solve the non-taxpayer problem. Staff who do not pay income tax will not get tax relief whichever tax relief method their scheme uses⁴.

There is a change coming. From 6 April 2029, salary sacrifice pension contributions above a £2,000 annual cap attract both employer and employee National Insurance contributions³⁴. The reform will not change the impact of salary sacrifice on adjusted net income³⁴. There is more on salary sacrifice for pension contributions and a direct comparison on salary sacrifice vs relief at source.

What protects you, and where it stops

The rules that govern how your contribution is treated are set out in tax law and enforced through HMRC and the scheme itself. If your employer fails to pass on contributions, the Pensions Regulator is the body to report missing payments to⁶.

The protection that matters most here is the relief itself, and it has edges. Relief at source gives you the 20% whether or not you pay tax, but only up to £3,600 of gross contributions if you have no earnings⁵. Net pay gives you relief automatically at your highest rate, but gives nothing to someone who pays no income tax². Higher and additional rate taxpayers in relief at source schemes get nothing extra unless they claim⁴.

If you are unsure which method your scheme uses, or you think a top-up has not arrived, your scheme administrator is the first point of contact. The Pensions Regulator notes it can take up to three months for money to be paid into your pension⁶.

For free, impartial guidance on your pension options, Pension Wise is available, and MoneyHelper covers the basics of personal pensions¹⁷. If you have a complaint about how your scheme has handled your contributions or relief, the Pensions Ombudsman can look at it.