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Pension Contributions and Tax Relief in the UK
UK pension contributions attract income tax relief at your marginal rate, subject to annual and lifetime limits. Employer pension contributions are usually a deductible business expense and don't trigger NI.
Quick answers
What is the pension annual allowance for 2025/26?
£60,000 — covering both personal contributions (plus tax relief) and employer contributions across all your pension schemes. Unused allowance from the previous 3 tax years can be carried forward if you were a pension scheme member in those years. High earners face a tapered allowance down to £10,000.
Are employer pension contributions tax-deductible?
Yes — employer pension contributions to a registered scheme are usually a Corporation Tax-deductible expense (subject to the 'wholly and exclusively' rule), free of NI for both employer and employee, and not taxable on the employee at the time. They count toward the employee's £60,000 annual allowance.
How does the tapered annual allowance work?
If your adjusted income exceeds £260,000 and threshold income exceeds £200,000, the £60,000 annual allowance reduces by £1 for every £2 of adjusted income over £260,000, down to a minimum of £10,000. Both income tests must be breached for tapering to apply.
How pension tax relief works
Personal contributions to a registered UK pension scheme attract tax relief at your marginal rate:
- Relief at source (most personal pensions/SIPPs): you pay net of basic rate (20%); higher and additional rate relief is claimed via Self Assessment
- Net pay (most workplace schemes): contributions are deducted from gross pay before tax
Annual allowance 2025/26
- Standard allowance: £60,000
- Includes employer contributions and any personal contributions plus tax relief
- Carry forward unused allowance from the previous 3 tax years if you were a member of a UK pension scheme in those years
Tapered annual allowance
If your adjusted income exceeds £260,000 and threshold income exceeds £200,000, the £60,000 allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000.
Money Purchase Annual Allowance (MPAA)
If you've flexibly accessed a defined-contribution pension (e.g. taken income drawdown beyond the tax-free lump sum), your defined contribution pension allowance drops to £10,000 a year with no carry-forward.
Lifetime Allowance — abolished
The Lifetime Allowance was abolished from 6 April 2024. It's been replaced with two new lump-sum allowances:
- Lump Sum Allowance (LSA): £268,275 — caps tax-free cash you can take across all pensions
- Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100 — caps tax-free lump sums on death
Tax relief limits
You can get tax relief on contributions up to the higher of:
- 100% of your relevant UK earnings, or
- £3,600 gross per year (the basic amount)
This applies to personal contributions only — employer contributions don't count toward this earnings limit but do use the £60,000 annual allowance.
Employer contributions
Employer pension contributions are usually:
- Deductible for Corporation Tax (subject to the "wholly and exclusively for trade" rule)
- Free of NI for both employer and employee
- Tax-free to the employee at the time of contribution
- Counted toward the employee's annual allowance
This makes employer pension contributions a very tax-efficient way for owner-managed companies to extract profit.
Auto-enrolment minimum (2025/26)
| Source | Minimum |
|---|---|
| Employer | 3% |
| Employee | 5% |
| Total | 8% of qualifying earnings (£6,240–£50,270) |
Practical tips
- Use carry-forward before the £60,000 allowance is reduced again
- Consider salary sacrifice for employee contributions — saves NI on both sides
- For director-shareholders, a one-off employer contribution can reduce Corporation Tax substantially in a high-profit year
- Keep evidence of "wholly and exclusively" for HMRC scrutiny on large director contributions
General guidance, not tax advice. Speak to a qualified accountant for advice tailored to your situation. Figures relate to the 2025/26 UK tax year. Source: HMRC, gov.uk.
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