Members Pensions and tax

Income tax can affect your pension, so it pays to understand how it works.

Pensions and tax relief See frequently asked questions

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Income tax basics

You only pay income tax if your earnings are higher than the income tax personal allowance in a tax year (April to April). 

The standard income tax personal allowance is currently £12,570 a year. If you earn less than this, you won’t pay any income tax. 

Some people may have a different personal allowance. If you claim Marriage Allowance or Blind Person’s Allowance, it will be higher. If you earn more than £100,000 a year, it will be lower. 

If you’ve paid too much tax, or not enough, in previous years, you may also have a different amount of personal allowance.  

You can check the amount of your personal allowance and your tax code on the government website.  

Tax-free cash

You can usually take up to a quarter (25%) of your pension savings as tax-free cash. The rest is taxed at the highest rate of income tax you pay in that tax year.  

If you are taking tax-free cash, you’ll need to keep an eye on your total income that tax year in case taking the cash pushes you in to a higher tax bracket. 

The lump sum allowance 

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The total amount of tax-free cash you can take from all your pensions is limited by the lump sum allowance. This is £268,275 for the April 2026 to April 2027 tax year.  If the amount of cash you want to take from all your pensions means your tax-free cash will be higher than this, you’ll have to pay tax on the amount over the allowance. 

There’s also a lump sum and death benefit allowance that applies to your pension savings after you die. It’s the maximum amount that can be paid tax-free from all your pension savings. For most people, this allowance is £1,073,100 for the April 2026 to April 2027 tax year.   

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Pensions and tax relief

The money you pay in to your pension savings gets tax relief – you don’t pay any income tax on it.  

If you pay basic-rate tax at 20%, here’s how tax relief works.     

  • Your workplace takes your pension payments out of your earnings before the tax comes off.   
  • You only pay tax on what’s left.   
  • So if you pay in £100, the full £100 goes into your pension savings.   
  • If you take the £100 as salary rather than paying it into your pension savings, you only get £80, because your workplace takes £20 out as income tax.  

now:pensions is a net pay scheme. This means payments into your pension savings come out of your salary before income tax is taken off. So you automatically get full tax relief at the highest rate of income tax you pay.  

The annual allowance

You get tax relief as long as the amount you and your workplace pay into all the pensions you save into in a tax year, including now:pensions and any other pensions you’ve got, doesn’t go over the annual allowance for pension contributions. This is £60,000 a year for most people.  

You could, if you wanted to, pay up to £3,600 into your pension savings in a tax year, including your salary and any other UK relevant earnings which includes things like statutory sick pay, self-employed income and taxable benefits in kind. You’d still get tax relief as long as the total amount you and your workplace paid in to all your pension savings didn’t go over the annual allowance.   

Find out more about UK relevant earnings on the government website. 

Carrying your annual allowance forward

If you go over your annual allowance, you have to pay tax on the amount over the allowance.   

If you use all your annual allowance in a tax year, carry forward allows you to use any unused annual allowance from the last three tax years. This means you could save more into your pension in the current tax year and still qualify for tax relief. 

You can carry your unused annual allowance forward like this for up to three years as long as:  

  • you’ve been a member of a pension scheme that’s registered with HMRC (like now:pensions) in each of the tax years you want to carry the allowance over from 
  • you earn at least the amount of money you want to pay in to your pension savings in the current tax year, and 
  • you haven’t triggered the money purchase annual allowance (see below).  

You can check the government’s website to see if you have any unused allowances you can carry forward. 

Find unused allowances

The money purchase annual allowance

You need to watch out for this allowance if you want to start taking income out of your pension savings while you’re still paying into a pension. It reduces the combined amount you and your workplace can pay into your pension, and still get tax relief, to £10,000 a year. 

This won’t stop you paying more than £10,000 into your pension savings. But if the amount you and your workplace pay in to your pension savings goes over the money purchase allowance in a tax year, you’ll have to pay tax on the amount over the allowance.

You can’t carry forward unused money purchase annual allowance. 

Here are some examples of when the money purchase annual allowance does and doesn’t usually apply.  You can check on the government website whether the money purchase allowance applies to you.  

The money purchase annual allowance

Usually applies if you… Doesn’t usually apply if you…
take some or all your pension savings as cash, other than tax-free cash  turn a small amount of pension savings, worth £10,000 or less, into cash
put your pension savings into a drawdown arrangement and start taking income from it  put your pension savings into a drawdown arrangement but don’t take any income from it, other than tax-free cash 
buy a flexible annuity where income could go down  buy a lifetime annuity to give you a guaranteed income that doesn’t go down  

Frequently asked questions

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Yes. You don’t pay income tax on the money you pay into your pension. The whole pre-tax amount goes into your pension savings. 

now:pensions is a net pay arrangement. This means your pension payments come out of your earnings before taking off income tax. 

Here’s how this works 

  • Your workplace takes your pension payments out of your salary before the tax comes off. 
  • You only pay tax on what’s left. 
  • So if you pay in £100, the full £100 goes into your pension savings. 
  • If you take the £100 as salary rather than paying it into your pension savings, you only get £80, because your workplace takes £20 out as income tax. 

If you’re a higher-rate taxpayer, you’ll get tax relief on your pension payments at your highest rate. 

If you don’t pay income tax, you don’t automatically get tax relief, but you’ll get a tax top-up from HM Revenue & Customs.

If you count as self-employed, you’ll need to claim your tax relief yourself when you do your self-assessment tax return.

Annual allowance

You can pay up to the whole of your salary – 100% – into your pension savings and still get tax relief, as long as the amount you and your workplace pay in doesn’t go over the  annual allowance. This applies to all the pensions you’re actively saving into, including now:pensions and any personal pensions you have. It doesn’t apply to your State Pension.

For most people, the annual allowance is £60,000 for the tax year 2025 to 2026. If you go over this you’ll have to pay tax on the amount over the allowance.

If you use all your annual allowance in a tax year, carry forward allows you to use any unused annual allowance from the last three tax years. This means you could save more into your pension in the current tax year and still qualify for tax relief.

You can’t carry forward any annual allowance if you’ve triggered the money purchase annual allowance.

Money purchase annual allowance

If you start taking money out of your pension savings while you’re still paying in to them, the money purchase annual allowance – currently £10,000 a year – could affect you. This means the total amount you and your workplace can pay into your pension savings and still get tax relief goes down to £10,000 a year.

The tax top-up scheme means you can get tax relief on money you pay in to your pension savings, even if you don’t earn enough to pay income tax.

How tax top-up works

now:pensions is a net pay arrangement. This means your pension contributions come out of your earnings before income tax is taken off. If you’re a taxpayer, you get automatic tax relief at your highest rate for that tax year. But if you don’t pay income tax, you don’t get tax relief.

Until January 2025 now:pensions had a tax top-up scheme to make sure members who didn’t earn enough to pay income tax didn’t miss out. You could apply to us for a top-up. If you qualified, we made top-up payments directly in to your pension savings.

But we were the only net pay pension scheme to do this.

Our tax top-up campaign success

For a number of years we campaigned, in partnership with the Net Pay Action Group, for the government to make top-up payments to non-taxpaying members of net pay schemes. We’re delighted this has been successful.

The government tax top-up

The government will now give you a tax top-up if you’re paying in to a workplace net pay pension scheme, but don’t earn enough to pay income tax. This usually means you earn less than the personal income tax allowance, currently £12,570 a year.

HM Revenue and Customs (HMRC) will contact you if you qualify, and pay the money directly to you (not into your pension savings). These payments are expected to begin in 2026 for the 2024/25 tax year.

Not while they’re building up. When you start to take your money out of now:pensions, you can usually have up to a quarter (25%) of it as tax-free cash, up to a maximum of £268,275. The rest is taxed like any other income. But you don’t pay National Insurance contributions on it.  

now:pensions is a net pay pension scheme. You, the workplace, take pension contributions out of workers’ gross pay and pay them into now:pensions before income tax is deducted.  

You’ll need to: 

  • work out pension contributions on gross (before tax) pay, and 
  • calculate and deduct your workers’ income tax after you’ve taken their pension contributions. 

As a result, your workers who are taxpayers won’t pay any income tax on their pension contributions. They automatically get full tax relief. 

Workers who don’t earn enough to pay tax don’t normally get tax relief. The government has set up a scheme to pay a tax top-up to these workers, so they don’t miss out. HM Revenue & Customs (HMRC) will contact workers who aren’t taxpayers directly about this. Payments are expected to begin in 2026 for the 2024/25 tax year.

Self-employed workers will need to claim tax relief through their annual self-assessment tax return.

What other types of tax relief are there? 

There’s another type of tax relief arrangement called relief at source. In this kind of arrangement the workplace takes workers’ pension contributions from their pay, after income tax has been taken off. 

The pension scheme then claims the tax relief from HMRC each month, adding the basic tax rate of 20% to workers’ contributions.

Higher or additional-rate taxpayers can claim back the rest of their tax relief from HMRC through their annual Self-Assessment tax return. 

Make sure you set up your tax relief correctly

For now:pensions, you must set up your workplace pension for tax relief on the net pay basis. Otherwise, your workers’ contributions won’t be worked out correctly and you could end up having to compensate for any losses they may incur. If you’re not sure how to do this, please ask us for help using webchat.