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Phil Thomas
Senior Technical Support Consultant

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Member contributions, tax relief and annual allowance

Published  04 December 2024
   10 min read

An individual can pay as much as they like into a pension but unfortunately, there's a limit on the amount of tax relief that can be given.

Key facts

  • Tax relief is based on tax years.
  • Annual allowance is based on pension input periods. Pension input periods are aligned with tax years.
  • Tax relief on individual contributions and contributions paid on behalf of the individual by anybody other than their employer is limited to the higher of £3,600 a tax year or 100% of relevant UK earnings.
  • Annual allowance is £60,000 unless the money purchase annual allowance or tapered annual allowance apply.
  • Individual contributions are unrestricted although a tax charge applies on contributions above the annual allowance, money purchase annual allowance or tapered annual allowance.
  • Income from a pension is not relevant UK earnings.
  • Investment income, property rental income and dividends don't count as relevant UK earnings.
  • Three main methods in giving tax relief: relief at source, net pay arrangement, and relief on making a claim.
  • Any contributions over the annual allowance, money purchase annual allowance or tapered annual allowance available may attract a tax charge.

This article looks at how much an individual can pay into a pension scheme and how tax relief is given. For information on employer contributions read our Company, employer contributions and tax relief article.

How much can someone pay into a pension?

Individuals, including the self-employed, can contribute to any number of pension plans.

Personal contributions made by an individual are unlimited. However, there is a limit on the amount of gross contributions they can pay each year and benefit fully from tax relief.

Tax relief on personal contributions is restricted to the higher of £3,600 or 100% of relevant UK earnings (opens in a new window) that are chargeable to UK income tax for the tax year.

Relevant UK earnings are to be treated as not being chargeable to income tax if due to a double taxation arrangement they are not taxable in the UK. 

Tax relief is only given in the tax year the contribution is paid.

Some providers will only accept personal contributions that attract tax relief.

Looking at two examples, an individual with no relevant UK earnings can get tax relief on a contribution of up to £3,600 while an individual with relevant UK earnings of £25,000 can receive tax relief on contributions up to £25,000.

What are relevant UK earnings?

In short this is:

  • employment income
  • self-employed income
  • income from patent rights
  • certain redundancy payments*
  • earnings from overseas crown employment
  • royalties
  • income from commercial furnished holiday lettings business

This means salary counts as relevant UK earnings. Investment income, buy to let income and dividends don't. This can have implications for controlling directors in deciding whether to make a pension contribution as an individual or an employer contribution.

*Only part of a redundancy payment counts as relevant UK earnings. Our article, Redundancy payments being used for pension contributions gives more information on this.

How is tax relief given?

Let's look at the three main methods: relief at source, net pay arrangement and relief on making a claim.

Relief at Source

Type of pension scheme:
  • Personal pension (including stakeholder).
How does the tax relief work?
  • Pension contribution is made from individual's salary after deduction of income tax.
  • When a pension contribution is received by the provider, basic rate tax relief is normally added to the contribution.
  • The scheme administrator then reclaims the basic rate tax relief from HMRC.
What if tax relief at a rate higher than basic, is due?
  • Claimed through individual's self-assessment form or by writing to HMRC.
  • Can go back 4 tax years to claim back any tax relief greater than basic rate.

 

Net pay arrangement

Type of pension scheme:
  • Occupational pension scheme.
How does the tax relief work?
  • The employer deducts contributions from the individual's salary before income tax is deducted.
  • Must be used for all contributing members.
What if tax relief at a rate higher than basic, is due?
  • Given immediately.

For those individuals that earn below their personal allowance (standard personal allowance is £12,570 for 2024/25) and pay personal contributions to a scheme where tax relief is by the net pay method, historically, these individuals have not been able to get tax relief on their personal contributions. This has been rectified from 6 April 2024, as HMRC will now pay an amount equal to the basic rate of tax, based on the individual’s residency, to that individual. This will occur as soon as reasonably practicable after the tax year in which the contribution is paid.

Pensions relief relating to net pay arrangements

Relief on making a claim

Type of pension scheme:
 Retirement annuity contracts and some occupational pension schemes.
How does the tax relief work?
 Claimed through individual's self-assessment form.
Used when not possible to use relief at source and net pay arrangement.
What if tax relief at a rate higher than basic is due?
 Claimed through individual's self-assessment form.

Further details of how higher rate tax relief is given can be found in Member contributions and higher rate tax relief.

HMRC Pensions Tax Manual - PTM044100: Contributions: tax relief for members

 

What is the annual allowance?

The annual allowance is the total amount of contributions that can be paid (and pension savings built up, in a defined benefit scheme) in a tax year, for (or in respect of) an individual, before a tax charge applies (the annual allowance charge). This allowance applies to all personal contributions, self-employed contributions, company/employer contributions and contributions for the individual paid by a third party, for example a grandparent.

Find out more in our annual allowance article.

The annual allowance is different to the limit on tax relief for personal contributions.

Can a third-party contribute to a pension on someone’s behalf?

The payment of contributions is not limited to the individual or employer/company; other people can also make contributions on the individual's behalf.

These contributions are treated as if they are paid by the individual with the limits that apply to personal contributions. So, tax relief is restricted to the higher of £3,600 or 100% of relevant UK earnings. It's the individual themselves who gets the tax relief; not the third party making the contribution.

If the contributions are for (grand)children, tax relief will be restricted to £3,600 gross per year unless they have relevant UK earnings.

Third-party contributions count towards the annual allowance, money purchase annual allowance or tapered annual allowance.

Some frequently asked questions

A. Sort of. The individual will receive full tax relief on their personal contributions up to 100% of relevant UK earnings (or £3,600, if greater) in a tax year.  

However, as the total contributions are over the annual allowance, (or money purchase annual allowance or tapered annual allowance as appropriate) there will be a tax charge equal to the individual’s marginal rate of tax which will effectively removing all tax relief from the excess contributions over the annual allowance.

For example, if Sally has UK earnings of £80,000 and tax relief is given by the relief at source method, she can pay a net contribution of up to £64,000. The provider will gross this up to £80,000 and claim the £16,000 basic rate tax relief from HMRC. Sally will then claim higher rate tax relief through her self-assessment but will also have to declare that her pension input amount is £20,000 over the annual allowance (assuming she has no unused annual allowance, to carry forward).

A tax charge equal to her marginal rate of tax will be levied, effectively removing all tax relief from the excess contributions.  If the money purchase annual allowance or tapered annual allowance applied to her the tax charge would be levied on the difference between £80,000 and the lower annual allowance that applies.

A. Yes, but most pension providers (including Royal London) will not accept contributions that exceed an individual’s relevant earnings.

A. If the contributions meet the 'wholly and exclusively' conditions the company/employer can claim corporate tax relief in respect of them. These contributions count towards the annual allowance, money purchase annual allowance or tapered annual allowance  and if that results in contributions of over £60,000 being paid in respect of an individual, an annual allowance charge will be payable by the individual, unless they have unused annual allowance they can carry forward.

A. Yes, since 8 July 2015, pension input periods have been aligned to the tax year for all plans.

A. No, it's unused annual allowance that's being carried forward, not unused tax relief. If Sally, in the example above, had unused annual allowance of at least £20,000 to carry forward, she could avoid the annual allowance charge.

However, if she had paid less than 100% of her earnings in previous years, that unused tax relief couldn't be carried forward to justify tax relief on personal contributions of more than £80,000.

You cannot carry forward unused annual allowance to pay a contribution to a money purchase plan if the money purchase annual allowance applies.

A. Since 6 April 2006, contributions paid by and in respect of controlling directors are subject to the same limits and restrictions as anyone else.  

HMRC Pensions Tax Manual - PTM043200: Contributions in respect of members who are directors who are shareholders or connected to a controlling director

A. Contributions can be made post age 75 (if the provider accepts them). Personal contributions are not relievable pension contributions and cannot qualify for tax relief. This means the 100% of relevant UK earnings limit is irrelevant and that personal contributions don’t count towards the annual allowance.

 

A. Pension contributions can be based on the relevant earnings for the full tax-year (not just on the earnings up to age 75).

A. Yes. But the compensation payment made into a pension plan is classed as a personal contribution. This means that it is subject to the usual tax relief limitations.
 
HMRC Pensions Tax Manual -PTM044100 - Contributions: tax relief for members: conditions (opens in a new window)


A. Yes. The Seafarer’s deduction means the individual’s earnings are subject to UK income tax but a deduction from the tax due can be made of up to 100%, depending on the length of time in the tax year that they’re away from the UK.

As the earnings are subject to UK income tax, they count as relevant UK earnings even although they don’t pay UK tax (or reduced UK tax). That allows the provider to claim basic rate tax relief from HMRC. No higher rate tax relief can be claimed by the individual as no higher rate tax is paid.

More general information about tax and seafarers can be found at: Seafarers Earnings Deduction: tax relief if you work on a ship (opens in a new window).

 

More frequently asked questions

Here we look at more questions that we've been asked about contributions paid to UK registered pension schemes, tax relief and tax charges.

Read more  about More frequently asked questions

Further information

Company, employer contributions and tax relief

This article looks at how much a company or employer pay into a pension plan.

Read more  about Company, employer contributions and tax relief

Member contributions and higher rate tax relief

This article looks at how higher or additional rate tax relief is given on pension contributions.

Read more  about Member contributions and higher rate tax relief

Annual allowance

An annual allowance for pension savings applies each year, which is based on a pension input period. This limits the amount of tax privileges available on pension savings each year.

Read more  about Annual allowance

Redundancy payments being used for pension contributions

Being made redundant can cause financial hardship but for others it can help them boost their pension savings.

Read more  about Redundancy payments being used for pension contributions

Money purchase annual allowance

This article explains what the money purchase annual allowance is, what triggers it and the impact on defined benefit schemes.

Read more  about Money purchase annual allowance

Tapering of annual allowance for high incomes - adjusted and threshold incomes

This article looks at how the annual allowance is reduced for people with an adjusted income over £260,000 and a threshold income over £200,000.

Read more  about Tapering of annual allowance for high incomes - adjusted and threshold incomes

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.