Most people assume that pension tax relief simply happens automatically when they contribute to a workplace scheme. In practice, two entirely different mechanisms deliver that relief — net pay and relief at source — and which one applies to your scheme can make a material difference to your annual pension saving, particularly if you earn below the personal allowance or if you are a higher or additional rate taxpayer who forgets to claim.
Understanding both arrangements is especially important for internationally mobile individuals with UK pension interests, high earners managing contribution levels across multiple schemes, and anyone planning year-end pension contributions with tax efficiency in mind.
The Principle Behind Both Methods
UK pension tax relief operates on the premise that contributions are made from pre-tax income. Practically, that means a basic rate taxpayer contributing £100 to their pension should benefit from £25 of government top-up, leaving a net personal cost of £80 to deliver £100 of saving. A higher rate taxpayer should receive total relief of £40 on the same £100 contribution.
The two methods achieve this outcome — or attempt to — in different ways.
Net Pay Arrangement
Under a net pay arrangement, your employer deducts your pension contribution from your gross salary before calculating income tax. Your taxable pay is therefore reduced by the contribution amount. You receive tax relief at whatever marginal rate you pay income tax, automatically, through payroll.
Example: You earn £60,000 and contribute 8% of salary (£4,800) to your employer's net pay scheme. Your employer calculates PAYE on £55,200 rather than £60,000. At higher rate (40%), the tax saving is £1,920. Your pension pot receives £4,800. Your net cost is £2,880.
Key feature: Relief is immediate and automatic. You do not need to claim anything via self-assessment. If you pay income tax at 40% or 45%, you receive the full higher rate relief without further action.
The lower earner anomaly: Here is where net pay creates a serious problem. If you earn below the personal allowance (£12,570 in 2026–27), you pay no income tax at all. Under a net pay arrangement, your contribution still reduces your taxable income — but since you owe no tax, there is no saving. Your pension pot receives only the amount you actually put in. You receive zero tax relief despite being entitled to basic rate relief in principle. Prior to the top-up measure (which applies to contributions from the 2024–25 tax year), this affected roughly 1.2 million workers on lower incomes, many of them part-time or on term-time contracts.
Relief at Source
Under relief at source, you contribute from your take-home (net) pay. Your pension provider then claims basic rate tax relief directly from HMRC and adds it to your pot. This top-up arrives within a few weeks of the contribution.
Example: You wish to add £100 to your pension. You pay in £80. Your scheme claims £20 from HMRC (20% basic rate relief). Your pot receives £100.
Higher and additional rate claimback: Relief at source delivers 20% basic rate relief automatically. If you are a higher rate taxpayer (40%), the additional 20% must be claimed through self-assessment. HMRC will either reduce your tax bill or issue a refund. Additional rate taxpayers (45%) can claim the further 25% difference (45% minus the 20% already received) similarly via self-assessment.
Critical action for higher rate taxpayers: Many employees in relief at source schemes fail to register for self-assessment or forget to include pension contributions on their return. This means they receive only 20% relief on all contributions regardless of their tax rate, effectively leaving money on the table. If you have not been claiming, it is possible to back-claim up to four prior tax years.
HMRC's Top-Up Fix for Low Earners (from 2024–25)
Recognising the injustice of lower earners in net pay schemes receiving no relief while equivalent workers in relief at source schemes received 20%, HMRC introduced a top-up payment — the "low earner's pension payment" — for contributions made from the 2024–25 tax year onwards. Workers who earn below the personal allowance and contribute to a net pay scheme receive a government top-up equivalent to basic rate relief (20% of their gross contribution), paid directly to them (not to the pension pot) after the end of the relevant tax year. The payment is administered through HMRC and based on information provided by scheme administrators. The first payments — in respect of 2024–25 — are being made during the 2025–26 tax year, with eligible individuals contacted by HMRC.
Practically, this means the lower earner anomaly is substantially addressed for contributions from the 2024–25 tax year onwards. Workers affected by this in earlier tax years have no retrospective remedy beyond their own scheme's goodwill.
Which Schemes Use Which Method?
Most large occupational defined contribution master trusts — NEST, The People's Pension, Now Pensions — use relief at source because they enrol members across a wide earnings range and it is administratively simpler for HMRC to manage one flat claim rate. Some NEST competitors and many older trust-based occupational schemes use net pay.
Defined benefit public sector schemes — NHS, teachers, civil service, armed forces, local government — universally use net pay arrangements. Members receiving final salary or CARE benefits within these schemes should be aware that contributions are deducted from gross pay and that higher rate relief is received automatically.
Personal pensions and SIPPs operated by insurance companies and investment platforms (Hargreaves Lansdown, AJ Bell, Fidelity, interactive investor, etc.) all use relief at source, as do most group personal pension (GPP) contracts. This makes them administratively simpler for higher rate claimants who may forget to use self-assessment, but does require active self-assessment management.
Practical Planning Points for High Earners
Check your scheme type first. Review your payslip: if your gross salary is reduced by your pension contribution before the income tax calculation, you are in a net pay scheme. If your take-home pay is reduced but your taxable gross remains unchanged, the scheme uses relief at source.
Self-assessment for relief at source higher rate claimants. If you contribute £40,000 annually to a relief at source SIPP, HMRC adds £10,000 automatically (basic rate). You are personally owed a further £10,000 at 40% tax. That money does not arrive unless you file a self-assessment return and declare pension contributions. HMRC does not always prompt you automatically.
Annual allowance and relief interaction. The annual allowance (£60,000 in 2026–27, or tapered for adjusted income above £260,000) is measured by your gross contribution — i.e., including the relief added by the scheme. If you contribute £48,000 net to a relief at source pension, the gross amount in the allowance calculation is £60,000.
Overseas complications. If you are resident overseas and contributing to a UK pension from non-UK earnings, you may still be entitled to relief at source on up to £3,600 gross (the non-earner limit) if you have no relevant UK earnings. However, HMRC will not automatically add the relief if your earnings are foreign — you may need to demonstrate entitlement. This is an area where specialist advice is important.
Non-Taxpayers and the £2,880 Contribution Rule
Anyone — regardless of earnings or residency — can contribute up to £2,880 net to a UK personal pension or SIPP using a relief at source scheme, and receive the 20% basic rate top-up from HMRC, bringing the gross contribution to £3,600. This applies to non-earning spouses, children, and even overseas residents with UK domicile interests. The contribution must be made in sterling to a UK-registered scheme.
This is a useful planning tool for topping up a spouse's pension using surplus family income, or for grandparents funding pension savings for younger family members over time.
Common Mistakes to Avoid
Assuming relief arrives automatically when it does not. Higher rate taxpayers in relief at source schemes routinely lose thousands of pounds per year by not claiming through self-assessment.
Overlooking the anomaly in net pay schemes. Employers with workers on low or variable incomes should consider whether their scheme choice is appropriate. Moving to a relief at source arrangement resolves the lower earner problem (though the low earner's pension payment, covering contributions from 2024–25, now partially mitigates it for net pay schemes).
Misunderstanding what "tax relief" means on contribution certificates. A relief at source scheme certificate typically shows the gross contribution including HMRC top-up. If you are comparing contribution levels across schemes, always use gross figures.
Conflating net pay with salary sacrifice. Salary sacrifice is a separate contractual arrangement by which you give up part of your salary in exchange for an employer pension contribution. It is not the same as net pay arrangement, though it also uses pre-tax income. Salary sacrifice removes the contribution from the national insurance calculation as well as income tax, providing additional savings for both employee and employer. A separate guide covers salary sacrifice in detail.
Summary Comparison
| Feature | Net Pay | Relief at Source |
|---|---|---|
| Contributions from | Gross salary (pre-tax) | Net pay (post-tax) |
| Basic rate relief | Automatic through payroll | Claimed by scheme from HMRC |
| Higher rate relief | Automatic — no action needed | Must claim via self-assessment |
| Lower earner issue | Yes (mitigated by top-up from 2024–25) | No — all contributors receive 20% uplift |
| Typical scheme types | DB occupational, some DC trusts | SIPPs, GPPs, NEST, most master trusts |
| Non-earner contributions | Not possible (must have earnings) | Up to £2,880 net / £3,600 gross |
How Global Investments Can Help
Global Investments works with internationally mobile individuals who often maintain UK pension interests alongside overseas employment and investment portfolios. Our advisers can review your existing pension arrangements to confirm which relief mechanism applies, identify unclaimed higher rate relief, and advise on structuring contributions across multiple schemes to maximise tax efficiency. For those approaching year-end planning or managing complex income from several jurisdictions, a structured pension review can surface significant recoverable relief. Contact our pensions team to discuss your circumstances in confidence.
This guide is for information only and does not constitute financial or tax advice. Pension and tax rules can change. The value of pensions can fall as well as rise. Always seek regulated financial advice before making pension decisions.
This guide is for general information only and does not constitute financial, legal or tax advice. Pension rules, tax rates and programme details change; verify current requirements with a qualified and FCA-regulated pensions adviser before acting. Pension transfers involving defined benefits over £30,000 require regulated advice.