The power of pension tax relief and how it could boost your retirement income

If you’re saving for retirement, you will want to get the most out of what you’re putting into your workplace or private pension.

Fortunately, there are plenty of tax efficiencies when you save your wealth into a pension.

Indeed, any investment returns generated within your fund are typically free from Income Tax and Capital Gains Tax.

Better yet, you can also receive tax relief on your contributions, significantly bolstering the value of your pot over time.

Despite these advantages, many people overlook one of the most valuable benefits pensions offer.

Research from PensionsAge (8 December 2025) found that 44% of UK adults don’t know what pension tax relief is, while just 31% could identify its purpose.

Over time, missing out on pension tax relief could be costly. So, continue reading to find out how pension tax relief works and how it could significantly improve your retirement income.

Pension tax relief is when the government tops up your contributions

When you pay into a pension, the government essentially “tops up” these contributions based on your marginal rate of Income Tax. Looking at it another way, tax relief acts as a “refund” of the Income Tax you have already paid on the money you put in your pot.

As a result, in England, Wales, and Northern Ireland, a £100 payment into your pension would typically cost:

• £80 if you pay basic-rate Income Tax
• £60 if you pay higher-rate Income Tax
• £55 if you pay additional-rate Income Tax.

Please note, Income Tax bands and rates are different in Scotland, which affects pension tax relief.

For most personal pensions, basic-rate tax relief is applied automatically using a system known as “relief at source”. Some schemes use net pay arrangements, where tax relief is applied differently (this article talks about relief at source only).

If you pay higher- or additional-rate tax, you’re usually entitled to relief at your marginal rate. However, this portion isn’t added automatically. Instead, you usually need to claim it through your self-assessment tax return or by directly contacting HMRC.

Many people forget to do this. Standard Life (24 February 2025) estimates that up to £1.3 billion of extra relief went unclaimed between the 2016/17 and 2020/21 tax years.

This can make a considerable difference:

• A £1,250 total pension contribution would cost a basic-rate taxpayer £1,000, as £250 is added by HMRC.
• For a higher-rate taxpayer, the same total contribution would only cost £750 once the extra relief is claimed.

As such, ensuring you claim everything you are entitled to could substantially increase the amount of money you can put towards retirement.

If you believe you have missed out in the past, it’s worth noting that it is possible to backdate your tax relief claims for up to four tax years.

There are limits to the amount you can tax-efficiently contribute to your pension

While the incentives of tax relief are generous, there are limits on how much you can pay into your pension each year tax-efficiently.

You can receive tax relief on any pension contributions worth up to 100% of your earnings for that tax year. But if you surpass the Annual Allowance, your contributions could face a tax charge.

The Annual Allowance sets the maximum amount that can be contributed across all your pensions in a single tax year without incurring a tax charge.

As of 2025/26, this is £60,000. While the Annual Allowance does reset each year, you may be able to carry forward unused allowances from the previous three tax years, provided you were still a member of a pension at the time. You also need to use all of the current year’s allowance before you can carry forward.

It’s vital to note that if you have a high income, you may face the Tapered Annual Allowance.

In 2025/26, this means that when your income exceeds £200,000, and your adjusted income (which includes your pension contributions) is above £260,000, the Annual Allowance falls by £1 for every £2 earned above that level. Just remember that the minimum it can fall to is £10,000.

What’s more, if you’ve already started accessing your pension wealth, you may have triggered the Money Purchase Annual Allowance.

This typically reduces the amount you can tax-efficiently contribute to your pension to £10,000 each year.

Compounding returns over time can make pension tax relief even more attractive

One of the most practical aspects of tax relief is that it’s added straight to your pension, where it is usually invested on your behalf by your provider.

Any growth is reinvested, allowing your savings to benefit from “compounding”. This is the “growth on growth” effect that further boosts your returns over a longer period of time.

Standard Life (21 August 2025) gives an example of how beneficial this can be.

If you contributed £200 to your pension each month from age 25 to 65, and your investments grew at an average rate of 5% each year, your pot could be worth around:

• £29,400 after 10 years
• £73,000 after 20 years
• £232,000 after 40 years.

While you might imagine that your pot would grow from £73,000 after 20 years to £146,000 after 40 years, it would actually increase in value significantly more. This is thanks to compounding returns and long-term growth.

As such, making regular payments, starting early, and making full use of tax relief can all improve your financial security later in life.

Contact us

We can help ensure you’re claiming all the pension tax relief you’re entitled to, helping you secure peace of mind for your retirement. Please get in touch to arrange a meeting.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

The Financial Conduct Authority does not regulate tax planning.