- Guide
Whatever your goals, it’s crucial to start saving for your retirement. Putting aside money isn’t always easy but it’s important to achieving financial security for your future.
How do I pay into my pension?
You can contribute personally to your own individual pension arrangement, or you can pay into a workplace pension provided by your employer. Whatever you decide to do, paying contributions into a pension is a tax-efficient way to boost your retirement savings.
How does my employer contribute to my pension?
If you're part of a workplace scheme, your employer may already be making contributions on your behalf, in addition to any personal contributions you pay. Depending on the way you contribute and the type of pension scheme, there are different ways in which contributing to a pension can be tax efficient. We have added some examples below.
The value of the tax benefits will depend on your individual circumstances.
Salary sacrifice
Your employer might offer a salary sacrifice arrangement (sometimes called salary exchange). Here, you agree to sacrifice part of your salary in exchange for an employer contribution. You won't pay income tax or National Insurance (NI) on the amount you sacrifice. The tax and NI savings can be used to either boost your pension contribution while keeping your take-home pay the same, keep your contribution the same and boost your take-home pay, or a combination of both.
Salary sacrifice isn't suitable for everyone and can’t be used where the post-sacrifice salary will be less than the National Minimum Wage or National Living Wage. If you want more information on the suitability of salary sacrifice, you should get financial advice. If you don’t have a financial adviser, you can visit MoneyHelper to find the right one for you.
Net pay arrangement
Your employer deducts your gross contribution from your gross pay (before it’s taxed and paid out to you) – so you only pay tax on what you earn after your pension contribution has been deducted from your pay.
For example, if you pay £100 into your pension, this is deducted from your wages before tax is calculated, so you don’t pay any tax on the £100 pension contribution. This means you get full tax relief at your highest marginal rate of income tax.
If you don’t pay UK income tax – or your earnings are below the current personal allowance – your contributions will still be deducted before salary is paid out to you. However, you won't benefit from tax relief using this method. This method of tax relief typically applies to occupational pension schemes.
Relief at source
Here, your employer deducts your net contribution from your net pay (after it’s taxed). Your pension fund will be boosted by the basic rate tax relief due, which the pension scheme will claim from HM Revenue & Customs (HMRC). If you pay a higher rate of tax, you can claim further tax relief by contacting HMRC or through your annual self-assessment tax return.
For example, if you want to pay £100 a month into your pension, you would pay £80 to the pension scheme from your taxed earnings, and the scheme will top this up to £100, claiming £20 of tax relief from HMRC.
If you’re a non-taxpayer, you can still get basic-rate tax relief on the first £2,880 (£3,600 gross) you contribute into your pension scheme each tax year. For a personal pension scheme, tax relief is generally given using the relief at source method.
What is the maximum I can put into my pension?
As pension contributions attract valuable tax benefits, there are limits on how much you can put in.
The annual allowance is the maximum amount you can save into your pensions in a tax year before you have to pay a tax charge. In practice, you're subject to a tax charge (the annual allowance charge) where your pension savings (including employer contributions), exceed your available annual allowance for a tax year. This is £60,000 this tax year.
There's nothing to stop you paying in more than your available annual allowance. You'd have to pay an annual allowance charge on the excess but could still claim tax relief on all your personal and third party contributions up to the higher of 100% of the income you pay tax on or £3,600 a year.
If you have unused annual allowance in any of the previous three tax years, you may be able to carry the unused amount into the current tax year. This will increase your annual allowance and allow higher contributions to be paid without incurring an annual allowance charge.
The annual allowance charge will claw back the tax relief granted to personal contributions which exceed the annual allowance for the tax year.
Note – high earners may be affected by a tapered annual allowance, where the annual £60,000 limit is reduced to as little as £10,000 – depending on earnings.
If you’ve flexibly accessed benefits from a pension (for example, taking income payments from a flexi-access drawdown arrangement), you're subject to a money purchase annual allowance (MPAA) that reduces the annual allowance from £60,000 to £10,000. If you're subject to the MPAA, you'll not be able to carry forward unused allowances from the three previous tax years to make higher contributions to a money purchase scheme.
You can find out more about the annual allowances in the gov.uk guide.
What is pension consolidation?
Pension consolidation is when you combine some or all of your pensions into one pension pot. You can usually move money from one scheme into another scheme – transferring your pensions and combining them.
As you change jobs over time, you may collect a number of different pension pots. Combining your pensions pots into one plan could be an effective way to keep track of the money you're saving for retirement. It can make it more convenient to add money to one pot, instead of many.
Consolidating a pension may not be the best option for you. You may lose features, protections, guarantees or other benefits - so make sure you compare products before consolidating. It’s up to you to decide if this is the right decision for you. If you’re not sure, speak to a financial adviser - there may be a charge for this. If you don’t have a financial adviser, you can visit MoneyHelper to find the right one for you.
It’s important to remember the value of your consolidated pension pot can still fall as well as rise and the final value of your pension pot when you come to take benefits may be less than has been paid in.
Any new funds you move your money into will have their own set of risks that will be detailed in the fund information available to you.
Important information
The value of any tax benefits will depend on your individual circumstances. This information is based on our understanding of current taxation law and HMRC practice, which may change.