Ruth Jackson-Kirby
Tim Leonard
Pension contributions are at the heart of retirement planning. When you make a payment into your pension, you are making a pension contribution. And if your employer pays in, and you get tax relief from the government, these are pension contributions too.
Contributing enough to build a pension fund capable of delivering a comfortable retirement should be your aim. But balancing this with the pension contribution limits that the pension annual allowance allows is a must.
How do pension contributions work?
If you have been enrolled into your workplace pension, your contributions will be taken straight from your salary, so you may barely notice that money being tucked away ready for your retirement.
With a workplace pension, whenever you make a pension contribution your employer will make an employer pension contribution too. If you have a private pension you make contributions yourself, usually by bank transfer or direct debit from your current account.
To incentivise people to save for their retirement, you can also qualify for a contribution from the government when you make a payment into your pension. Commonly known as pension tax relief, this is essentially a refund of the income tax you have paid on that money.
» MORE: Guide to pension tax relief
What is the minimum pension contribution?
If you are paying into a workplace pension, the rules dictate that there must be a total contribution of at least 8% of your annual qualifying earnings.
Under the current rules the minimum employer pension contribution is 3% of your qualifying earnings. You would then be required to pay 4% of your qualifying earnings, with tax relief paid by the government on your employee contributions making up the final 1%. For example, you could put £40 a month into your workplace pension, your employer would add £30, and then you would receive £10 tax relief from the government, making a total of £80. Many employers pay more than this and match your contribution up to a certain amount or base contributions on your whole salary, but it is down to their individual policy.
If you are paying into a private pension that you have set up for yourself, such as a personal pension or a self-invested pension plan (SIPP), the minimum pension contributions that can be made here will depend on any lower limits set by your pension provider.
What does pension qualifying earnings mean?
Workplace pension contributions are calculated as a percentage of your pension qualifying earnings, which includes your salary and any commission, bonuses or overtime. For the 2024/25 tax year, this range of earnings is £6,240 to £50,270. If your earnings fall between these amounts, a percentage of them gets contributed to your workplace pension.
For example, if you are a basic-rate taxpayer earning £30,000, your qualifying earnings are £23,760 (as calculated by deducting the lower earnings threshold of £6,240 from your salary). Your minimum contribution of 4% would therefore be £79.20 a month, added to which you’ll receive basic-rate tax relief from the government of £19.80. Your employer’s minimum contribution of 3% would be £59.40 a month.
The qualifying earnings rules mean the maximum earnings your calculations can be based on is £44,030 – that is the upper limit of qualifying earnings of £50,270 minus the lower limit of £6,240. So if you are a higher earner, any money you make above £50,270 will not be factored into employer pension contributions – unless your employer bases its calculations on your whole salary, not just your pension qualifying earnings.
What is the pension annual allowance?
Because of the vast sums of money the government already spends on pension tax relief each year, there is a limit on how much money you can pay into a pension each year and earn tax relief. This is called the pension annual allowance.
If you pay in more and exceed the pension annual allowance, you won’t benefit from tax relief on any contributions above the limit as you will face a tax charge that negates any tax relief you would have received on these contributions. The pension annual allowance takes into account your contributions, those made by your employer, and the pension tax relief you receive.
What is the maximum pension contribution?
There is no limit on how much you can contribute to your pension each tax year. However, for most people, the maximum pension contribution you can currently make under the pension annual allowance and benefit from tax relief is the lower of 100% of your earnings or £60,000. So if you earn £25,000 a year, the most you can pay into your pension and qualify for tax relief is £25,000.
Once you start taking money out of your pension, the annual allowance will – in most cases – be replaced by the money purchase annual allowance and the amount you can carry on paying into your pension while qualifying for tax relief will fall to £10,000 a year.
What is pension carry forward?
Pension carry forward is where you are allowed to ‘carry forward’ and maximise any pension annual allowance that you haven’t used from the last three tax years. To make use of pension allowance carry forward, your earnings must be at least equal to the total contribution you want to make in a tax year, and you will need to have been in a UK registered pension scheme in the years that you want to carry forward.
Keep in mind that prior to 2023/24, the annual allowance was set at £40,000, so this amount applies for carry forward for the relevant previous tax years.
Are pension contributions taxable?
Your pension contributions are tax-free as long as you stay within the pension annual allowance or money purchase annual allowance. How this all works depends on how you make contributions to your pension.
Some people make their pension contributions from their gross salary – before they pay tax. This means nothing needs to happen and you will receive tax relief at whatever rate applies to you. The other method is where your contributions are made after your salary has been taxed. With this method, your pension provider claims back 20% basic-rate tax relief from the government. Higher- and additional-rate taxpayers can then claim back further relief that they are entitled to through their self-assessment tax returns.
How much should I contribute to my pension?
While the government lays down the minimum amount you must contribute to your workplace pension if you are enrolled, there are no guarantees this will be enough to provide you with a comfortable income in retirement. You can choose to pay more than that amount and, if you can afford to do so, it could be a shrewd financial move. If you have a private pension it is entirely up to you how much you pay in, although your plan is likely to have a minimum amount that you pay each month.
How much pension do I need to live comfortably?
A common saying is that you should take the age you start saving into your pension and halve it – that is the percentage of your salary you should put into your pension. So, if you are 20 when you start your pension, you contribute 10% of your salary for life. If you don’t start a pension until you are 40, you’re not too late, but you should contribute 20%.
Remember the figure you’re aiming for is the total of all the contributions to your pension, including employer pension contributions and tax relief. If your employer matches your employee contributions, this helps make meeting such targets easier still.
However, this is only a starting point when considering what to pay into a pension. In reality, how much you should pay will be a very personal choice that differs from one person to the next. This is because we all have different needs and financial circumstances both now and into retirement. You should base your contributions to reflect the level of income you want at retirement while making sure the contributions remain affordable for you. If you are unsure, it is worth seeking professional advice from a financial adviser.
» MORE: All about pension advice
Can I get my pension contributions back?
That depends on the type of scheme you have paid into and how long since you joined. But, as a general rule, you cannot get your pension contributions back, so make sure you only pay in money you can afford to lock away.
- Defined benefit: If you leave a defined benefit pension scheme, having been a member for less than two years, you may be able to get a refund of your contributions depending on your scheme’s rules.
- Workplace defined contribution scheme: If you leave within 30 days of being enrolled, you should be able to get your personal contribution back, unless your contributions were made via salary sacrifice.
- Personal pension: You can only get a refund of your contributions from a personal pension if you have been a member for less than 30 days and your contributions were not via salary sacrifice. The contributions will be returned net of basic-rate tax and will also factor in any investment gains or losses.
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