What is workplace pension tax relief?
The need-to-knows and need-to-dos about pension tax relief.
Key points
- Pension tax relief gives employee pensions a tax-free top-up
- Employers can benefit from paying lower corporation tax and National Insurance
- You’re responsible for compliance and keeping your records up to date
- Think about costs, set-up and engaging your employees to get the right supplier
Pension tax relief is the government’s way of giving you and your employees an extra bit of pep in your workplace pension financial step. Here we look at tax relief on auto-enrolment pension schemes: what it is and how it helps your business.
What is workplace pension tax relief?
Workplace pension tax relief is a top-up the government gives your employees when they make contributions to their pensions.
For employees, It effectively means that they don't pay income tax on the amount of their pension contributions. So, for a basic rate taxpayer, tax relief means that a £100 pension contribution actually costs them £80.
For employers, tax relief can also reduce the amount of operating profit subject to corporation tax. And by using salary sacrifice, businesses can see lower National Insurance costs.
Almost all employees with an auto-enrolment pension will get tax relief, even those who don’t pay income tax. But depending on how your scheme works, those who pay a higher rate may need to claim their tax relief through their self-assessment tax return.
To clear things up, it helps to look at the two main ways tax relief works: net pay arrangement and relief at source.
Net pay arrangement
A net pay arrangement means contributions, and therefore tax relief, comes from an employee’s gross salary before tax. This way, most employees get their tax relief automatically via PAYE, including those who pay income above the standard 20% rate. National Insurance contributions will still be deducted as normal.
From the 2024/2025 tax year any employees who don’t pay income tax, for example if their earnings are below the personal tax allowance, will be eligible for top-up payments from HMRC.
Relief at source
With relief at source, employee pension contributions come after taking income tax and National Insurance. Your pension provider then contributes the 20% basic rate tax relief and later claims it back from HMRC.
The government gives this extra 20% for all eligible employees, regardless of whether they pay income tax or not. This means anyone who doesn’t pay income tax doesn’t have to claim tax relief themselves.
But higher rate taxpayers must claim their extra tax relief by sending a self-assessment to HMRC.
Tax depends on individual circumstances and may change
What are the business benefits?
Pension tax relief does more than simply giving employees extra cash in their pension pots. There are a couple of major benefits for businesses, too.
Benefit: Pay less corporation tax 
How it works: Employers can deduct their contributions to employees’ pensions as a business expense, as long as they’re “wholly and exclusively” for business purposes. This can reduce the amount of operating profit a business has to pay corporation tax on.
So for example, if your business had an operating profit of £60,000 but you spent £10,000 on pension contributions, only £50,000 of the original profit would be subject to corporation tax.
Benefit: Lower National Insurance bill
How it works: Salary sacrifice – where an employee gives up part of their salary in exchange for a pension contribution – is a way for employees to make extra pension contributions. It effectively reduces an employee’s salary, meaning there’s less tax and National Insurance to pay.
Let’s take an employee earning £30,000 a year as an example. If they used salary sacrifice to put an extra £3,000 a year into their pension, their effective salary would come down to £27,000.
This lower amount would now be subject to income tax and National Insurance, and the employer pays less of the latter.
Limits and thresholds 
If you’ve set up an auto-enrolment pension scheme, when it comes to contributions there are a couple of key limits to be aware of.
- Employees can only get tax relief up to a certain amount on their personal contributions. This is currently up to £3,600 or 100% of what they earn in taxable income each year, whichever is highest.
- Every employee has an annual allowance - this is currently £60,000. This covers everything paid into the pension, by the employee, the employer, and any tax relief.
There might be some cases where an employee's annual allowance is lower than £60,000. If an employee has already taken money from their pension or has a high income, then different rules may apply. If the total contribution amount is over their annual allowance, then they might have to pay an annual allowance tax charge.
How do I choose the right provider?
When setting up your workplace pension, it’s important that your provider suits your business’s individual needs.
Every scheme looks great on a provider’s website, but there are a few things to look out for to cut the wheat from the chaff. To start with, have a think about:
- Costs
- How easy it is to set up the scheme
- How the scheme works with your payroll software
- Support with engaging your employees with their pension
But these are just a few of the factors that can make a great pension provider, and there’s more you should consider to find the right one for you. Our article on how to choose a workplace pension provider looks at the other factors you need to consider.
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