Why pension contributions get tax relief
Who this guide is for: For employees comparing workplace pension methods on a payslip or in the Income Tax Calculator.
The UK government encourages pension saving by giving tax relief on contributions within limits. In practice, that means part of what you save can reduce the Income Tax you pay — but the way it shows on your payslip depends on your scheme.
Most workplace schemes use one of these methods:
- Relief at source — you pay from take-home pay; the pension provider claims basic-rate tax relief from HMRC and adds it to your pot.
- Net pay arrangement — your employer takes the contribution from pay before Income Tax is calculated, so relief arrives through payroll.
- Salary sacrifice — you agree a lower cash salary in return for a pension contribution; see Salary Sacrifice Explained.
Separate annual limits on how much pension saving counts for the year are covered in Pension Annual Allowance Explained.
Compare net pay and relief at source
Salary sacrifice changes contractual pay and usually National Insurance as well as Income Tax — the full caveats live in Salary Sacrifice Explained. This table focuses on the two methods that mainly differ in how Income Tax relief is delivered.
| Aspect | Net pay | Relief at source |
|---|---|---|
| Where the contribution is taken | Deducted from gross before Income Tax | From net pay |
| Taxable pay falls? | Yes | No |
| Employee NI falls? | No | No |
| Provider adds basic-rate relief? | Not applicable (pre-tax) | Yes (20%) |
| Further relief may need claiming? | No — marginal rate via payroll | Yes for higher/additional-rate taxpayers |
Why the percentage on your payslip may not match the amount leaving your bank
- Qualifying earnings — many auto-enrolment schemes apply the percentage only to a band of pay (often from £6,240.00 to £50,270.00 in 2026/27), not to your full salary.
- Full gross salary basis — some schemes apply percentages to total pay instead.
- Relief at source — you may pay 80% of the gross contribution from your bank while the provider adds basic-rate relief.
- Employer contributions — appear in the pension, not as a deduction from your net pay.
Worked example
£45,000 with £2,400.00 employee contribution
Tax year 2026/27 · England · tax code 1257L · no student loan · National Insurance category A. Figures from Sorvuna's Income Tax Calculator.
| Take-home — salary sacrifice | £34,192.08 |
|---|---|
| Take-home — net pay | £34,000.08 |
| Take-home — relief at source | £34,000.08 |
| Employee NI — salary sacrifice | £2,401.92 |
| Employee NI — net pay | £2,593.92 |
| Employee NI — relief at source (key figure) | £2,593.92 |
| Relief at source — amount you pay from take-home | £1,920.00 |
| Relief at source — basic-rate relief added by provider | £480.00 |
Estimate take-home pay with different pension methods Use the Income Tax Calculator