NOW: Pensions operates a net pay scheme. This means pension contributions come out of your pay before income tax is taken off. As a result, if you’re a taxpayer you automatically get full tax relief – you don’t pay any income tax on the money you contribute to your pension.
If you don’t pay tax, you don’t automatically get tax relief, but you can claim your tax relief through our tax top-up scheme. See What is the tax top-up scheme? for more about this.
Other types of tax relief
You may have seen another tax relief arrangement, called a relief at source scheme, in other pensions. In this kind of scheme, if you pay basic-rate tax at 20%, 80% of your pension contributions come out of your take-home pay after income tax has been taken off.
The pension scheme then claims the tax relief from HM Revenue & Customs (HMRC) each month and pays it back.
HMRC only sends back the basic rate of tax: 20%. Higher or additional-rate taxpayers can claim back the rest of the tax relief from HMRC either by writing to them separately, or through their annual self-assessment tax return.