Pension contributions: Everything you need to know on pension contributions

The more you pay into your private pension the more comfortable your retirement is likely to be, so it’s a good idea to understand how pension contributions work and the rules that govern them.

What are pension contributions?

When you or your employer pay money into your private pension it is known as contributing; hence the term pension contributions. 

For example, if you have a full-time job that pays a salary of £40,000, and you and your employer each pay 5% of your salary into your workplace pension, then your total pension contribution would be £4,000 a year. 

Why are pension contributions important?

Most people are now responsible for building their own retirement fund, and pensions are a primary way to do that. The more you contribute to your pension, and the longer you do so, the more time and space there is for your pot to grow via interest payments, tax breaks and other incentives. 

That’s why financial advisers recommend that people should start paying into a private pension as soon as they start working. You’re never too young to start contributing. 

Who can contribute to your pension? 

The rules about pension contributions vary a little depending on the type of pension you have. 

Workplace pension

• You can pay in: Employers are legally obliged to auto-enroll all eligible employees into a workplace pension scheme. You can choose to opt out of this if you wish, but that’s rarely a good idea because you would then lose out on employer contributions. 
• Your employer must pay in: Workplace pensions come in several forms (auto-enrolment, salary sacrifice) but the principle is largely the same in that your employer contributes to your pension to complement/top-up your own contributions. 

We’ll go into auto-enrolment and salary sacrifice in more detail later.

Personal pension

• You can pay in: You can contribute as much as you like to your personal pension each year, and you'll get tax relief up to 100% of your relevant earnings or, if lower, the Annual Allowance, which is currently £60,000. This is the top line, but please note that tax relief rules may differ based on your income and employment type.
• Your spouse can pay in: Most Self-Invested Personal Pensions will allow your spouse or partner to pay into your pension pot alongside your own contributions, and many stakeholder pensions and standard personal pensions allow this too. 
• Other family members can pay in: As with contributions from your spouse or partner, many personal pensions allow other family members to contribute to your pension pot as well.

State Pension

Your State Pension amount is calculated based on your own qualifying years, meaning years in which you paid National Insurance Contributions or received National Insurance credits. 

As of 2025, the full state pension is £230.25 per week (£11,973 per year) but not everyone is entitled to that amount. How much you’ll get depends on your number of qualifying years; You need 10 qualifying years to get any state pension and 35 qualifying years to get the full state pension. 

How do pension contributions work?

When you’re contributing to a private pension scheme you either pay in a fixed regular amount each month, or you pay in as-and-when you want. 

If it's a workplace pension, how you contribute will differ by scheme, while contributing to a personal pension may have additional rules, caps and minimums. 

How are contributions taken from your pay?

In many cases workplace pension contributions are automatically deducted from your salary before your income tax and National Insurance is calculated. 

This isn’t the case with other types of private pensions though - with stakeholder pensions and SIPPs, you’ll usually make a contribution from income you’ve already paid tax on, and your pension provider will then claim that tax back. 

Pre-tax or post-tax?

Some pensions deduct contributions pre-income-tax and others post-income-tax. 

• When contributions are made pre-tax it’s known as a net pay scheme
• When contributions are made post-tax it’s known as a relief-at-source scheme. 

What Is the difference between gross and net pension contributions?

The difference between gross and net pension contributions can be a little confusing because most people know gross pay as pre-tax and net pay as post-tax. 

When it comes to pension contributions though, HMRC describes taking pension contributions out of an employee’s gross (pre-tax) pay as the ‘net pay arrangement’. 

How do net pay arrangements compare to relief at source?

In net pay arrangements income tax is calculated only after pension deductions are made, and your pension tax relief is therefore handled there and then. 

By contrast, relief-at-source schemes deduct 80% of a person’s pension contribution after income tax has been deducted, with the remaining 20% reclaimed later as tax relief through HMRC. 

For many workers the result is basically the same whether it’s a net pay or a relief-at-source scheme, but if you don’t pay income tax or you sit in a higher tax bracket then the differences between the two may be more relevant.

• If you don't pay income tax: If you don’t pay income tax then only relief-at-source schemes will ensure you get your pension tax relief/government top-up. Another way to say this is that if you don’t pay income tax and are in a net pay scheme, you’ll essentially pay 20% more for your pension. 
• Higher/additional rate taxpayers: If you’re a higher or additional rate taxpayer then you’ll only get your full tax relief up front if you’re in a net pay scheme. If you’re in a relief-at-source scheme then you’ll need to reclaim the tax relief you’re entitled to via self-assessment.  

What is tax relief on pension contributions?

When you contribute to your pension the government tops it up, either by allowing you to contribute before tax is deducted, or by returning income tax you’ve already paid if the contribution is after tax. 

Whether you call it tax relief or government top-up, it amounts to the same thing. 

Thanks to this tax relief pension savings are usually boosted by 20% or more, but the exact figure depends on the scheme you’re in and your rate of income tax. 

You can learn more about pension tax rules in the UK in our guide: Pension and tax: Everything you need to know

Does HMRC top up personal pension contributions?

HMRC tops up personal pension contributions within defined limits. Although you can pay as much as you wish into your pension, most people only get tax relief on contributions up to 100% of their relevant earnings or, if lower, the first £60,000. 

This £60,000 limit is known as your Annual Allowance, and it’s a total figure that applies across all your pensions.

What are the different types of pension contributions?

Now that we’ve covered how pension contributions work generally, let’s explore the specific types you might encounter.

When people talk about types of pension contributions, they’re usually referring to the different ways you can pay into a pension. For instance, with a workplace pension your contributions will largely be through auto-enrolment and possibly salary sacrifice. 

There’s also a type of voluntary contribution that can be used to top up your workplace pension (known as Additional Voluntary Contributions, or AVC), and of course if you’re self-employed then you may use personal pension contributions instead. 

What are auto-enrolment contributions?

Auto-enrolment is when employees are automatically enrolled in their employer’s pension, and auto-enrolment contributions are when both you and your employer pay at least the mandatory minimums into that workplace pension each month.

What is the minimum pension contribution level?

With auto-enrolment the minimum contribution is a total of 8% of your salary, which consists of:

• 5% from you (4% deducted from your wages + 1% government top-up)
• 3% from your employer.

Employers are legally required to contribute at least 3%, but many contribute more as an incentive to retain good people and remain competitive in the jobs market. Employers in the UK’s financial services sector, for example, contribute an average of 9.5% of their employees’ salaries. 

You can also contribute more than the minimum amount yourself if you wish, which would help your pension pot to grow more quickly.

Will pension legislation change in the future?

At the time of writing there are no plans to change auto-enrolment contribution minimums, but it is possible that future governments might decide to change it. 

What if I opt out of auto-enrolment?

You can opt out of auto-enrolment at any time and your employer is obliged to help you through that process. If you opt out within the first month of being enrolled you should get back any money you've paid in. 

Note that your employer is obliged to re-add you to the scheme after three years have elapsed, but if you’d still rather opt out then you can do so again. 

How do employer pension contributions work?

Employers are legally obliged to contribute 3% of your salary to your workplace pension, but many companies will agree to contribute more than that minimum - often through contribution matching. 

What are matching policies and contribution caps?

Matching policies are when your employer agrees to mirror or match what you contribute to your pension. 

If you contribute 5% of your salary then your employer will match that with their own 5%, and if you put in 8% then your employer will put in 8%, which can help your pension pot grow much more quickly than if they were contributing the 3% minimum that they’re legally obliged to contribute. 

While employers can theoretically match any level of contribution, most will have upper limits, or contribution caps, in place and there’s also the £60,000 Annual Allowance to consider. 

What is salary sacrifice?

Salary sacrifice is when you, as an employee, agree to a lower salary in exchange for larger pension contributions. This sacrificed salary is deducted from your gross/pre-tax pay, so it’s an efficient way to contribute to your retirement and to keep more of your money.

What are Additional Voluntary Contributions (AVCs)?

As the name suggests, AVCs are pension contributions above and beyond what you normally contribute each month. AVCs can be made whenever you like for as much as you like, so long as they don't exceed 100% of your salary. 

Some workplace pension schemes don’t allow AVCs, but if yours doesn’t then your employer is obliged to let you pay AVCs into an alternative retirement savings account.

How do personal contributions differ for the self-employed?

With no option for auto-enrolment into a workplace pension, the responsibility is on self-employed people to arrange their own private pension plan. 

But the same standard rules on tax relief and the tax-free allowance still apply to self-employed people too, even if they don’t have access to a regular workplace pension.

• Self-Invested Personal Pensions (SIPPs): Anyone between the ages of 18 and 75 in the UK can open a SIPP, including self-employed people. These pensions generally offer the same tax benefits as Workplace Pensions, in that there’s 20% tax relief and higher earners can claim more via self-assessment. The main difference is that SIPPs let you choose your investments from a very wide range of options, which makes them appealing to people who are interested in financial markets. 
• Stakeholder pensions: Stakeholder pensions are accessible to anyone – regardless of income or employment type - and defined by low minimum contributions, capped charges and strict government-set rules to hold them to account.
• Personal pensions: ‘Personal pension’ is a catch-all term for privately funded pension plans. Standard Personal Pensions may not have the same range of investment choice as a SIPP, while their rules on eligibility, contributions, access and charges may differ versus Stakeholder Pensions.

What are the pension contribution rules for the self-employed or those without an employer scheme?

Even if you’re self-employed the rules on contributing to a private pension are still essentially the same as they are for employed workers. The pension scheme you choose will largely steer how much and how often you pay in, and so long as you don’t contribute more than you earn or exceed the Annual Allowance (£60,000 for most people) then you’ll get the same tax relief.

Most pensions will claim the first 20% of tax relief for you and any additional relief can be claimed via self-assessment.  

How much should you contribute to your pension?

Everyone’s finances and lifestyle is different, so there’s no single figure for how much you should contribute to your private pension. The best approach is to work out a target savings total that will allow you to live the way you want and do the things you want to do in retirement, and then estimate how much you’ll need to contribute to reach that figure. 

How can I estimate my retirement needs?

Estimates from Retirement Living Standards (RLS) are a good guide to the savings required to fund retirement. RLS figures combine everyday running costs with special events, holidays and treats (and also take inflation into account) at three different levels: 

• Minimum standard of living
• Moderate standard of living
• Comfortable standard of living.

For a single person entering retirement now, RLS estimates that an annual retirement income of £13,400 would be required for a minimum living standard, with £31,700 required for a moderate lifestyle and £43,900 required for a comfortable lifestyle.

How do I balance affordability with my retirement goals? 

Living today while planning for tomorrow is a balancing act, and it’s one you'll have to define and navigate yourself based on how much you earn now, your current overheads, your individual circumstances, your retirement timeline and your goals for retirement when you get there. 

Do I have to contribute 5% to my pension?

Yes, if you’re enrolled in a workplace pension then your minimum pension contribution will be 5% of your salary - unless you opt out of auto-enrolment, which isn’t advisable because you’ll then miss out on employer contributions too. 

It’s also worth mentioning that in practice you’ll actually only have 4% deducted from your salary for your workplace pension contributions, since the government tops it up with an additional 1% through tax relief.

Is 12% a good pension contribution?

Yes, 12% is a solid pension contribution, and is the amount that both the UK government and financial advisers often recommend. 

Of course, the amount you earn should also be taken into consideration, because some financial advisers recommend aiming for a total pension pot worth £300,000, while others suggest multiplying your average earnings over time by ten to arrive at a suitable total.

Different people, firms and advisers offer different formulas, but the bottom line is that you should aim for a savings target that’s realistic, affordable and that will ensure you have enough savings to live the way you want to live in retirement. 

What is the “half your age” formula for pension contributions?

This formula helps you to work out how much of your salary to save into your pension each year based on the age you start. If you start saving at 22 years old then you save 11% of your salary for the rest of your working life. If you start saving at 30 then it’s 15% of your salary for the rest of your working life, and so on. 

This formula often gets misquoted because some people think the percentage keeps rising as you age. It doesn‘t. It's a constant percentage that is “half the age” at which you started, not half the age you are at each stage of your career.

Should I factor in the State Pension when calculating contributions? 

You can, but it’s essential you check your State Pension entitlement because not everyone stands to get the full amount. You can check your State Pension status at https://www.gov.uk/check-state-pension or call the Future Pension Centre on 0800 731 0175.

What are pension tax allowances?

Pension tax allowances refer to the annual maximum you can contribute to your pension and still receive tax relief. It’s often referred to as your Annual Allowance.

How does the pension tax-free Annual Allowance work?

Each tax year you’ll get tax-relief on all pension contributions, provided you don’t put in more than your annual salary or £60,000, whichever is lower. 

What is the Tapered Allowance for high earners?

The Tapered Allowance is an adjustment to the Annual Allowance that limits the amount of tax relief that high earners (usually those who earn more than £200,000 in a tax year) get on pension contributions. 

The standard Annual Allowance is £60,000, but a so-called ‘threshold income’ formula is used to taper higher earners’ allowance down to somewhere between £10,000 and £60,000. 

This taper will mean the standard Annual Allowance of £60,000 will be reduced by £1 for every £2 you earn above £260,000.

Can I carry forward unused allowances from previous years?

Yes, you can carry forward any unused annual pension allowance for up to three years.

What is the lifetime allowance?

The pension lifetime allowance was the total amount that you could save in pensions without incurring a tax charge, but this was abolished in April 2024 and replaced with three new allowances.  

• The lump sum allowance: Allows you to withdraw 25% of your total pension value as tax-free cash up to a maximum of £268,275. 
• The lump sum and death benefit allowance: Sets a maximum tax-free figure of £1,073,100 covering all lump sums paid to a pension holder during their lifetime and to their beneficiaries when they pass away.
• The overseas transfer allowance: Set at £1,073,100, this is the amount of your pension savings you can transfer into a Qualifying Regulated Overseas Pension Scheme (QROPS) without tax charges applying.

What happens if I exceed my Annual Allowance?

If you exceed your Annual Allowance for the year then first check if you have unused allowance from the last three years that you can ‘carry forward’ to this year. 

If not, then you won’t be entitled to tax relief on the excess and you’ll probably need to pay a penalty tax charge.

How can I avoid breaching my pension annual allowance limit?

You can track this yourself, consult your employer, or check your pension statements as they should highlight your usage for the current tax year. 

Remember that the Annual Allowance applies per person and not per pension, so if you have several private pensions then you’ll need to track your Annual Allowance across all of them.

How do pension contributions impact my take-home pay?

If you pay some of your salary into your pension then it will reduce your take-home pay, but because pensions are such a tax-efficient way of saving you’ll pay less tax and hold onto more of your own money in the long run. 

What’s the difference between salary sacrifice and standard contributions?

With a standard pension contribution the money comes out of your salary, whereas with a salary sacrifice scheme you agree to accept a lower salary in exchange for a bigger contribution to your pension. The difference goes straight into your pension with no fuss and you pay less in tax and National Insurance, making for more take-home pay.

How can contributions help me with tax bands and thresholds?

In simple terms, contributing more to your pension can help to reduce your total taxable income, which means a smaller proportion of that income might be subject to the higher or additional rate of income tax.  

Example

If Ali earns £60,270 in tax year 2025/26 then he’ll owe 40% income tax on £10,000 of his salary (beyond the personal allowance of £12,570 and the £37,700 basic rate tax limit). 

If Ali puts that £10,000 into his pension then he'll extend the earnings allowed at the basic rate to £47,270, this means he’ll save on tax and get to keep more of his own money. 

Also, as a higher rate taxpayer, that £10,000 contribution will only cost him £6,000 once tax-relief is applied.  

How often should I monitor and adjust my contributions?

It would be sensible to monitor and adjust your pension contributions regularly, using your pension statements to track where you are against your projections. Reassess your contributions if and when your circumstances change, and consider upping your payments to reflect any pay rises or bonuses you might receive. 

When should I seek financial advice?

There’s never a bad time to seek financial advice, but it’s a good idea to do so before, during and after any major financial events, such as a death, an inheritance, a pay rise, or a divorce. 

It would also be a good idea to speak to a financial adviser if you’re thinking of moving your pension fund to a different provider.

How to navigate special events and your pension

It would be a good idea to look at your pension targets and contributions before, during and after any milestones or major life events. 

Career breaks

Career breaks might seem like a natural time to pause pension contributions, but that could hurt you later. If you can't continue your regular payments then Additional Voluntary Contributions might be worth considering when you return to work, because they can help you to make up any shortfalls you might have incurred.

Maternity and paternity leave

If you’re employed and enrolled in your workplace pension scheme then your employer must continue contributing throughout your maternity or paternity leave. Employers should also continue to honour salary sacrifice pension payments provided your maternity/paternity pay isn’t under the national minimum wage.

If you’re self-employed then it will be your decision how much parental leave you’ll take and how much you will (or won’t) contribute to your pension during that time. 

Part-time work

Part time employees have the same pension rights as full-time employees, but because part-time earnings are usually lower your contributions may be too. 

Increase in salary

If your contributions are based on a percentage of your salary then you should increase your contribution amount with every pay rise. And even if you don’t work on a strict percentage, it’s still a good idea to contribute more if you can.

Decrease in salary 

If your salary drops then your pension contributions will either drop proportionately (if you’re in a workplace scheme) or you can choose to adjust what you pay in if you’re paying into another type of private pension. 

Ideally you’ll continue contributing something towards your pension on your lower salary so that it isn’t as difficult to make up the shortfall later.

Changing jobs or multiple employers

Many people work multiple jobs over their careers and it’s up to you to keep track of all the pensions opened in your name. You can consider combining or consolidating pensions as you go, and the government’s tracing service can help you to recover any lost or missing policies.  

Transferring or consolidating pensions

On the one hand, transferring or consolidating pensions can simplify your retirement planning as it means one scheme, one statement, one provider and one set of numbers, but on the other hand it can sometimes result in higher fees and lost benefits, so it’s important to weigh up your options before deciding.

Managing multiple pension pots

You can have as many pensions as you like, but the pension allowances and limits all apply per person, not per pension, which means it might be easier to manage a more limited number of policies.  

What are common pension myths and FAQs?

Am I too young to worry about pension contributions?

Pensions grow on the basis of investment returns and interest payments, both of which compound over time, so the younger you start the better. Many people start pension saving late in life, which often puts both them and their finances under pressure.

What if I can’t afford to contribute more?

When it comes to pensions, paying something is better than paying nothing so if you are doing what you can then it’s a great start, and you can always top up via Additional Voluntary Contributions when your finances improve.

Why can’t I rely solely on the state pension? 

Not everyone gets the full state pension of £230.25 per week (£11,973 per year) as you need 35 qualifying years (years in which you paid NI). You can check your state pension status on the government’s website.

But even if you do qualify for the full State Pension, it’s worth noting that even £12,000 a year falls significantly short of the £13,400 amount that Retirement Living Standards suggest is required per year for a single person to afford the lowest (minimum) standard of living, which covers the basics and no more.