For UK employees deciding whether they can afford to pay more into their pension. The common assumption — "I can't afford to increase my pension" — usually rests on a misunderstanding: people see a £200 deduction and assume opting out would return £200 to their bank account. It would not. Because pension contributions bypass Income Tax (and sometimes National Insurance), the real cost to your take-home pay is much smaller than the amount that lands in your pension. This guide shows exactly how that works. For the contribution-method comparison, see the salary sacrifice guide.
The core idea: tax relief is a government top-up
If you are a basic-rate (20%) taxpayer, earning £100 normally leaves you £80 after tax. Put that £100 into a pension instead and HMRC gives up its £20 cut — the full £100 lands in your pension, but your take-home only fell by £80. For a higher-rate (40%) taxpayer, £100 in the pension costs £60 of take-home. The government is, in effect, matching part of your contribution.
Three ways contributions are collected — and why it matters
| Method | Income Tax saved? | Employee NI saved? | Higher-rate relief automatic? |
|---|---|---|---|
| Net Pay Arrangement | Yes, before tax | No | Yes |
| Relief at Source | 20% added by provider; rest claimed manually | No | No — must claim via Self Assessment |
| Salary Sacrifice | Yes | Yes (8% or 2%) | Yes |
Salary sacrifice is the most efficient because it lowers your gross salary, so you avoid NI as well as tax — and your employer avoids their 13.8% NI, which many pass back into your pot. But it is a contractual change to your salary, with the caveats covered in the salary sacrifice guide.
Worked example: doubling a 5% contribution
An employee earns £50,000 and uses salary sacrifice. They raise their pension contribution from 5% to 10%.
- At 5%: £2,500/year into the pension; take-home ≈ £37,700.
- At 10%: £5,000/year into the pension; take-home ≈ £35,900.
- The result: the pension pot doubles (+£2,500), but take-home falls by only about £1,800. Tax and NI relief absorb the other £700.
The pattern holds at lower salaries too: the real cost of pension saving is always less than the headline deduction.
The £100,000 trap — where relief is worth 60%
For every £2 of income above £100,000 you lose £1 of Personal Allowance, creating a 60% effective marginal rate. Channelling earnings above £100,000 straight into a pension restores the allowance, so each £100 contributed effectively costs just £40 of take-home. For earners in this band, pension contributions are unusually hard to beat. See the tax planning guide for the full mechanics.
Common mistakes
- Higher earners not claiming extra relief. Under Relief at Source, the provider only adds 20% automatically. Higher-rate payers must claim the remaining 20% via Self Assessment or by contacting HMRC — and many never do.
- Forgetting the money is locked. Pension funds cannot normally be accessed until Normal Minimum Pension Age — 55 now, rising to 57 in 2028. The tax relief is the trade for that lock-up.
- Ignoring the Annual Allowance. Tax-relieved contributions are capped at £60,000/year for most people (lower for some very high earners under the taper). Exceeding it triggers an Annual Allowance Charge, though unused allowance from the previous three years can be carried forward.
Assumptions and limitations
Figures use 2026/27 bands and assume salary sacrifice on qualifying earnings. Your exact outcome depends on your tax code, Scottish residency, and your employer's collection method. Pension rules change with legislation; the £60,000 allowance and the £100,000 taper are not fixed forever. For tapered allowances, Lifetime Allowance queries, or large one-off contributions, an FCA-regulated adviser is worthwhile. Dial your own percentage up and down in the UK Salary Calculator, and project the long-term result in the Pensions Calculator.
Written and maintained by Shaun da Silva, Finance Consultant. Learn how we ensure accuracy and quality in our Editorial Policy.