PENSION GUIDE
How pension tax benefits work
Pension contributions may reduce today’s tax bill while building retirement savings, but the payroll method changes the effect on take-home pay.
Salary sacrifice
You agree to reduce contractual salary and the employer pays the sacrificed amount into the pension. Under current 2026/27 rules this commonly reduces both taxable pay and employee National Insurance. From April 2029, the government says employee salary-sacrifice pension contributions above £2,000 a year will become subject to employee and employer National Insurance, while the Income Tax exemption remains subject to the usual limits.
Net pay arrangement
Your contribution is taken before Income Tax is calculated, so tax relief is normally given through payroll. It usually does not reduce National Insurance pay.
Relief at source
Your contribution is taken from net pay and the pension provider normally adds basic-rate tax relief. Higher or additional-rate taxpayers may need to claim any extra relief from HMRC.
Full pay or qualifying earnings?
A contribution percentage may apply to full pensionable salary or only a band of qualifying earnings. For 2026/27, the automatic-enrolment qualifying earnings band is £6,240 to £50,270. Check your scheme documents rather than assuming the percentage applies to your whole salary.
Before increasing contributions
Check employer matching, scheme charges, access restrictions, contribution limits and how lower contractual pay could affect borrowing or salary-related benefits. Pension money is normally locked away until the permitted pension age, so keep suitable emergency savings.