pension tax relief

Pension Tax Relief Explained: Relief at Source, Net Pay and Salary Sacrifice Compared

Updated 23 August 20268 min readFact checked

How pension tax relief actually gets added to your pot under the three main UK pension setups, what higher-rate relief you have to claim yourself, and why salary sacrifice usually costs the least.

The three ways pension contributions get tax relief

How pension tax relief is added under each method
Method	How relief is added	What you need to do
Relief at source	Provider automatically adds 20% basic-rate relief on top of what you pay in	Higher or additional-rate taxpayers must claim the extra relief themselves, usually via Self Assessment
Net pay	Contribution comes off your pay before Income Tax is calculated	Nothing - full relief at your marginal rate is automatic
Salary sacrifice	Your contractual salary is reduced; your employer pays the contribution instead	Nothing - and it also saves National Insurance, unlike the other two

Most personal pensions and SIPPs, and a growing number of workplace schemes, use relief at source. Many traditional workplace pensions use net pay. Salary sacrifice (sometimes marketed as "smart pension" or "salary exchange") is offered separately by some employers on top of either of the other two - see the salary sacrifice explained guide for how the arrangement itself works.

Why salary sacrifice usually costs you the least, pound for pound

Getting £125 into your pension pot as a higher-rate taxpayer costs a different amount depending on the method. Under relief at source, you'd pay £75 once you've claimed back the extra higher-rate relief on top of the 20% your provider already added. Under a net pay arrangement, the same £125 costs you £75 too, since both eventually deliver full relief at your marginal rate. Salary sacrifice costs only £65, because on top of the Income Tax relief, sacrificing salary also saves £10 of employee National Insurance that the other two methods don't touch.

The Annual Allowance still applies, whichever method you use

All contributions count towards the same pension Annual Allowance, £60,000 for most people in 2026/27, regardless of which of the three methods added them - your own contribution, any employer contribution, and any basic-rate relief added, all added together. Very high earners can have this tapered down, and anyone who has already started flexibly drawing a pension is usually restricted to the Money Purchase Annual Allowance of £10,000 instead. The pension carry forward calculator covers tapering, the MPAA and unused allowance from previous years in detail - this guide focuses on how relief is added, not how much you're allowed to add.

What to check if your employer offers a choice

If salary sacrifice is on offer, it's usually the cheapest of the three for the same amount landing in your pot, since it's the only one that also saves National Insurance for both you and your employer.
Your contractual salary genuinely falls under salary sacrifice, which can matter for mortgage affordability assessments, some means-tested benefits, and statutory redundancy pay calculations.
If you're on relief at source and pay tax above the basic rate, check you're actually claiming the extra relief - it isn't automatic, and HMRC won't chase you for unclaimed relief the way it would for unpaid tax.
Net pay and salary sacrifice both give full relief automatically, so there's no separate claim to remember either way.

This is a general explainer, not personalised financial advice. The salary sacrifice pension calculator runs the real numbers for your own salary if your employer offers that option.

Helpful answers

Frequently asked questions

01What's the difference between relief at source and a net pay pension?

Both give you full tax relief eventually, but they get there differently. A net pay pension deducts your contribution from your salary before Income Tax is worked out, so you get relief at your full marginal rate automatically, with nothing to claim. A relief-at-source pension deducts your contribution after tax, then your provider claims basic-rate relief (20%) from HMRC and adds it to your pot - if you're a higher or additional-rate taxpayer, you have to claim the extra relief yourself, usually through Self Assessment.

02Why does salary sacrifice save more than a normal pension contribution?

Because it works before your pay is taxed at all, not just before Income Tax. Sacrificing salary reduces your contractual pay, so you and your employer both pay less National Insurance on the sacrificed amount too, on top of the Income Tax relief you'd get either way. A relief-at-source or net pay contribution only ever saves Income Tax; it doesn't touch your National Insurance bill.

03Do I need to claim higher-rate pension tax relief myself?

Only if your pension uses relief at source (most personal pensions, SIPPs, and some workplace schemes) and you pay tax above the basic rate. Your provider automatically claims the basic-rate 20% for you; the additional relief up to your marginal rate has to be claimed through your Self Assessment tax return, or by contacting HMRC directly if you don't otherwise need to file one. Net pay and salary sacrifice contributions never need this extra claim, since full relief is already built in.

04What is the pension Annual Allowance, and does it apply to all three methods?

It's the most you can pay into pensions in a tax year with tax relief, £60,000 for most people in 2026/27, covering the total of your own contributions, any employer contribution, and any basic-rate relief added, added together regardless of which of the three methods you used. It can be tapered down for very high earners, or restricted to £10,000 under the Money Purchase Annual Allowance if you've already started flexibly drawing a pension. See the pension carry forward calculator for how tapering and unused allowance from previous years work.

05Which method should I use if my employer offers a choice?

If salary sacrifice is offered, it's usually the most tax-efficient of the three, since it's the only one that also saves National Insurance, for both you and your employer (some employers pass some of their saving back to your pension too). The main trade-off is that your contractual salary genuinely falls, which can affect mortgage affordability assessments or income-based benefit calculations, so it's worth checking those aren't relevant to you before opting in.

Sources

About the author

Eman Munir, ACCA

Eman Munir is a Chartered Certified Accountant (ACCA) and co-founder of MySums, which is built and maintained in house. The money guides here are written by hand, with every worked example checked before it goes live and the figures revisited as each tax year changes. More about who is behind MySums.

Figures on this page are checked against HMRC and other UK government sources for the 2026/27 tax year. You can read our editorial policy and the calculation methodology behind the tools. MySums gives general information, not personal financial advice — see the full disclaimer.