How a pension contribution cuts your tax
Last reviewed 29/07/26
Last Gov update 07/08/26
Money you put into a pension is income the government does not tax now. You are taxed on it later, when you draw it in retirement, and usually at a lower rate than you pay today. That makes a pension contribution one of the few ways an employee can genuinely lower a tax bill.
A contribution is untaxed income
When you pay into a pension, the tax you would have paid on that money is not collected. You save at your marginal rate, the rate on your next pound of income. A basic-rate taxpayer saves 20p on every pound, a higher-rate taxpayer 40p, and inside the £100,000 trap around 60p. The pound still lands in your pension in full. Only your take-home falls, and by less than the pound, because of the tax saved.
The three ways to contribute
The money can reach your pension in three ways, taxed slightly differently. With net pay the contribution leaves your salary before Income Tax. With relief at source it leaves after tax, and the pension provider claims the basic-rate part back, with any higher-rate relief claimed on your tax return. With salary sacrifice you give up part of your salary in return for a larger employer contribution.
Why salary sacrifice wins
All three save you Income Tax. Salary sacrifice does one more thing. Because you give up salary rather than spend it, you pay less National Insurance too. That extra saving is money the other two methods leave on the table. The worked example above shows the same contribution reaching the pension for less out of take-home under salary sacrifice.
It escapes the traps too
A contribution also lowers the income your tax is measured against. That is what pulls someone back under £100,000 to rescue their Personal Allowance, or under £60,000 to keep their Child Benefit. The guides to the £100,000 tax trap and the Child Benefit charge show those rescues in full.
The £60,000 limit
There is a ceiling. You can get tax relief on up to £60,000 of pension contributions a year, or your total earnings if they are lower, counting what your employer puts in as well. Very high earners have a smaller limit, and the calculator works this out for you.
Read the full guide to the pension Annual AllowanceSee your own numbers
Open the pension options in the calculator and try a contribution. It shows the tax and National Insurance you save, your new take-home, and what the contribution does to your marginal rate.
Common questions
How much tax do you save on a pension contribution?
You save at your marginal rate, the rate on your next pound. A basic-rate taxpayer saves 20p per pound, a higher-rate taxpayer 40p, and inside the £100,000 trap around 60p. The full pound still lands in your pension. Only your take-home falls, and by less than the pound because of the tax saved.
Is salary sacrifice better than a normal pension contribution?
Usually yes. All three methods save Income Tax, but salary sacrifice also cuts National Insurance, because you give up salary rather than spend it. That extra saving is money net pay and relief at source leave on the table, so the same contribution reaches your pension for less out of take-home.
What is the difference between net pay and relief at source?
With net pay the contribution leaves your salary before Income Tax, so your relief is immediate. With relief at source it leaves after tax and the provider claims the basic-rate part back, with any higher-rate relief claimed on your tax return. The money reaching your pension is the same either way.