In December 2025, PensionsAge reported that 31% of UK adults couldn’t identify the purpose of pension tax relief. A further 44% didn’t even know what it was.
When pressed, the 2,000 people surveyed demonstrated confused and varied understandings. Some thought it enabled the government to match individuals’ pension contributions. Others thought it allowed pensioners to receive all their income tax-free.
In reality, pension tax relief is a government-supplied boost to the pension contributions you make, helping you to grow your retirement savings.
However, this is just one way in which your pension is tax-efficient. Continue reading to learn more about pension tax relief and three more pension tax benefits you could unlock in 2026.
1. You may already be receiving pension tax relief
If you pay into a pension, you likely already benefit from automatic pension tax relief at 20%, deposited directly into your pension pot.
If you pay the basic rate of Income Tax and contribute £200 into your pension, the government will top this up with an additional £50.
The relief is designed to help build your pension more quickly so that, when you finally start drawing from it, you’ll have more wealth to fund your retirement.
You will receive automatic tax relief if:
- Your employer takes workplace pension contributions from your pay before deducting Income Tax
- Your pension provider claims tax relief from the government at the basic rate (20%) and adds it to your pension pot – known as relief at source.
It’s worth noting that if you pay Income Tax at the higher or additional rate, the process isn’t so simple.
2. If your income is taxed above the basic rate, you can claim higher rates of pension tax relief from HMRC
As a higher- or additional-rate taxpayer, you can claim further tax relief on top of the basic rate of 20%.
PensionsAge reports that “the majority” of higher earners are missing out on this extra relief, with potentially hundreds of millions of pounds left unclaimed.
The rate of relief you are entitled to depends on your Income Tax band:
- Higher-rate taxpayers can claim an extra 20% tax relief.
- Additional-rate taxpayers can claim an extra 25%.
You can claim this extra relief through self-assessment or HMRC’s portal, either by yourself or with the help of a financial planner.
Tax relief is applied up to the Annual Allowance threshold
You cannot claim an unlimited amount of tax relief. Instead, the amount you can pay into your pension without facing a tax charge is capped by the Annual Allowance. This is fixed at £60,000 a year for the 2025/26 tax year.
You can receive tax relief on any pension contributions so long as they don’t total more than 100% of your yearly earnings or exceed the Annual Allowance.
However, if your “threshold” income is more than £200,000 a year, you may trigger the Tapered Annual Allowance. This reduces your £60,000 allowance by £1 for every £2 that your “adjusted” income exceeds £260,000. This could decrease your allowance to £10,000.
Additionally, if you flexibly access money from your defined contribution (DC) pension, this could trigger the Money Purchase Annual Allowance, which also stands at just £10,000.
3. Sacrificing part of your salary can help you remain tax-efficient
Salary sacrifice is an agreement with your employer to exchange part of your pre-tax pay for a benefit, such as workplace pension contributions.
Sacrificing part of your salary can reduce Income Tax and National Insurance contributions (NICs) and even increase your take-home pay. It could also be used to reduce your income to prevent you from moving into a higher tax bracket.
It’s important to note that the rules for salary sacrifice and NICs are changing. From April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice will be exempt from employee and employer NICs.
4. When you access your pension, you’ll usually be entitled to 25% of it as a tax-free lump sum
When you reach retirement and access your pension fund, you can usually take up to 25% of your DC pension pot as tax-free cash – up to the Lump Sum Allowance (LSA), which stands at £268,275 for the 2025/26 tax year.
Outside of your tax-free lump sum, pension withdrawals are typically subject to Income Tax at your marginal rate.
You can take lump sum payments all at once or as smaller payments, and we can help you decide which is the right option for you.
Get in touch
While pension tax rules might seem complex, speaking to an Engage Wealth Management financial planner can help you make the most of your pension’s tax efficiency, so you can reap the rewards in the future.
Email us at [email protected] or call us on 01273 076 587 today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
