Advanced Taxation (UK) · Income tax: the comprehensive computation of taxable income and the income tax liability

Pension Contributions and Relief in the ATX Income Tax Computation

Updated 11 October 2026 · Fact-checked

Pension relief reduces tax on money paid into a registered pension scheme. Personal contributions get relief up to the higher of £3,600 and relevant earnings. Total contributions are tested against the annual allowance (£60,000, tapering to a £10,000 minimum). Any excess, after carry forward, is taxed at your marginal rates.

Understand Pension Contributions and Relief in the Computation

A registered pension scheme is a tax-favoured way to save. You get tax relief on the money going in. The fund grows free of tax. Tax limits how much can go in each year with relief, using the annual allowance.

There are two separate tests. First, how much relief do you get on a personal contribution? Second, has the annual allowance been exceeded? Students often mix these up. Keep them apart in your answer.

For personal contributions, relief is limited to the higher of £3,600 gross and your relevant earnings (broadly employment and trading income) for the year. Under relief at source, you pay 80% of the gross amount and the scheme claims 20% basic rate relief. You then get higher or additional rate relief by extending your basic rate band and higher rate band by the gross contribution. Under net pay, the employer deducts the contribution before PAYE, so taxable pay falls and you get full relief automatically.

Employer contributions are different. They are normally an allowable deduction for the employer (if wholly and exclusively for the business). They are not a taxable benefit for the employee. They do count towards the annual allowance.

The annual allowance is £60,000 for 2023/24 to 2025/26. It is £40,000 for 2022/23. Unused allowance can be carried forward from the previous three tax years if you were a scheme member in those years. For high earners the allowance is tapered down to a minimum of £10,000. Any excess is added to your income as the top slice and taxed at the rates that apply to it.

Key rules to remember

Limit on personal contribution relief: Maximum relievable gross contribution = higher of (relevant earnings, £3,600); Employer contributions are not limited by this test. They are checked against the annual allowance instead.
Relief at source: amount paid: Net payment = gross contribution × 80%; Basic rate relief is given at source. Extend the basic rate band by the gross amount (£37,700 + gross) for higher rate relief.
Net pay arrangement: Taxable employment income = gross pay − gross contribution; Do not extend the bands. The relief is already in taxable income.
Annual allowance: £60,000 for 2023/24 to 2025/26; £40,000 for 2022/23; minimum (tapered) allowance £10,000; Use the tax tables given in the exam.
Threshold income and adjusted income: Taper applies only if threshold income > £200,000 AND adjusted income > £260,000; Threshold income is net income less gross personal contributions paid under relief at source. Adjusted income is net income plus employer contributions and net pay employee contributions.
Tapered annual allowance: Allowance = £60,000 − ((adjusted income − £260,000) ÷ 2), but not below £10,000; Reduce by £1 for every £2 of adjusted income over £260,000.
Carry forward: Available = unused allowance of the previous 3 tax years, earliest year first; You must have been a member of a registered scheme in each year. Use the current year's allowance first.
Annual allowance charge: Charge = (pension input − allowance − carry forward used) × your marginal rate; The excess is taxed as the top slice of your income.

How to solve Pension Contributions and Relief in the Computation questions

Use this order for any pension question. It separates relief from the annual allowance test.

1Identify the type of contribution: personal (relief at source or net pay) or employer. Check the date and tax year.
2Check the relief limit for personal contributions: higher of £3,600 and relevant earnings. Cap the gross figure if needed.
3Gross up relief at source payments (net ÷ 80%). Extend the basic rate band and higher rate band by the gross amount. For net pay, reduce employment income instead.
4Complete the income tax computation. Remember that gross personal contributions reduce adjusted net income for personal allowance and the £100,000 restriction.
5Work out total pension input for the annual allowance: personal gross plus employer plus net pay contributions.
6Check tapering: threshold income above £200,000 and adjusted income above £260,000. Compute the reduced allowance, minimum £10,000.
7Deduct the current year allowance, then use carry forward from the earliest of the three previous years. Tax any remaining excess at the rates for the top slice of income.
8State the conclusion: tax saving, any charge, and the advice or planning point asked for.

Quickest way: Gross, extend, then test the allowance

When to use it: Use this when a Section A or B question asks for the tax saving from a contribution or whether an annual allowance charge arises.

Write the gross contribution first. Net ÷ 0.8 if relief at source.
Tax saving beyond the 20% given at source is gross × (marginal rate − 20%) on the part that would have fallen in the higher bands. Check that it fits the extended band.
Write the total pension input and the allowance in one line. Check the taper only if income is above £200,000 and £260,000.
Excess × marginal rate. Use 45% if the income is already above £125,140.

Common mistakes in Pension Contributions and Relief in the Computation

Extending the basic rate band by the net payment instead of the gross payment.
The question gives the cheque amount and you use it as given.
Fix: Always gross up by ÷ 0.8 first. Extend the band by the gross figure.
Treating employer contributions as a taxable benefit or limiting them to the £3,600 or earnings limit.
You apply the personal contribution rule to everything.
Fix: Employer contributions are a deduction for the employer and not taxable for the employee. They only count towards the annual allowance.
Applying the taper because adjusted income is above £260,000 without checking threshold income.
You remember one test and forget the other.
Fix: Test both: threshold income above £200,000 and adjusted income above £260,000. Both must be met.
Using carry forward from the latest year first, or using it before the current year allowance.
You pick the largest unused amount.
Fix: Use the current year first, then the earliest of the three previous years.
Forgetting that carry forward needs scheme membership in the year it comes from.
The unused figure is given and looks automatically available.
Fix: Check the facts for membership of a registered scheme in each carry forward year.
Taxing the annual allowance charge at the basic rate or at the wrong top slice rate.
You ignore that the excess is added on top of income.
Fix: Add the excess as the top slice, then apply 20%, 40% or 45% according to the bands it falls into.

Worked examples

Example 1

In 2025/26 Helen has employment income of £80,000 and no other income. She pays a personal pension contribution of £24,000 net under relief at source. Calculate her income tax saving from the contribution, ignoring the 20% added at source. Use the personal allowance of £12,570.

Show the solution

Gross contribution = £24,000 ÷ 80% = £30,000. Relevant earnings are £80,000, so the contribution is fully relievable.
Without the contribution: taxable income = £80,000 − £12,570 = £67,430. Tax = £37,700 × 20% = £7,540, plus £29,730 × 40% = £11,892. Total £19,432.
With the contribution: basic rate band extended to £37,700 + £30,000 = £67,700. Taxable income £67,430 is entirely within the basic rate band. Tax = £67,430 × 20% = £13,486.
Saving from the extended band = £19,432 − £13,486 = £5,946. This equals £29,730 × (40% − 20%).
The basic rate relief of £6,000 (20% of £30,000) was given at source, so total relief is £11,946.
Annual allowance: input £30,000 is below £60,000, so no charge.

Answer: Extra income tax saving £5,946, in addition to £6,000 basic rate relief given at source. Total relief £11,946. No annual allowance charge.

Example 2

In 2025/26 Raj has net income of £270,000, all employment income. His employer pays £60,000 into his registered pension scheme. He has no personal contributions. His unused annual allowance is £5,000 from 2022/23, nil from 2023/24 and £10,000 from 2024/25. He was a scheme member throughout. Calculate his annual allowance charge.

Show the solution

Threshold income = £270,000, which is above £200,000. Adjusted income = £270,000 + £60,000 = £330,000, which is above £260,000. The taper applies.
Reduction = (£330,000 − £260,000) ÷ 2 = £35,000. Tapered allowance = £60,000 − £35,000 = £25,000, which is above the £10,000 minimum.
Pension input £60,000 − allowance £25,000 = excess £35,000.
Carry forward is available: £5,000 + £0 + £10,000 = £15,000. Use the earliest year first, so all of it is used.
Remaining excess = £35,000 − £15,000 = £20,000.
Net income is already above £125,140, so the excess is taxed at 45%. Charge = £20,000 × 45% = £9,000.

Answer: The annual allowance charge is £9,000.

Exam tips

Read the tax year and the scheme type carefully. Relief at source and net pay need different treatment, and the question usually says which applies.
Show the gross figure and the extended band clearly. Marks are given for the band calculation even if a later figure goes wrong.
Write both taper tests with figures. Then state the reduced allowance and the minimum of £10,000.
List carry forward year by year, with scheme membership checked. State the order you use them.
In advice questions, mention that employer contributions avoid NIC and the £3,600 or earnings limit. Mention too that contributions can bring income below £100,000 and restore the personal allowance.

Practice questions from Income tax: the comprehensive computation of taxable income and the income tax liability

Pension Contributions and Relief in the Computation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsPension Contributions and Tax Relief Limits

Pension Contributions and Relief in the Computation: frequently asked questions

What is the difference between net pay and relief at source?

Under net pay the employer deducts the contribution from gross pay before PAYE, so taxable earnings fall. Under relief at source you pay 80% of the gross amount, the scheme claims basic rate relief, and you extend your basic rate band for higher rate relief. Net pay needs no band extension.

How does carry forward of the pension annual allowance work?

You can use unused annual allowance from the previous three tax years, if you were a member of a registered scheme in those years. Use the current year's allowance first and then the earliest of the earlier years. Only use it if pension input exceeds the current allowance.

How do I calculate the tapered annual allowance?

Check that threshold income is above £200,000 and adjusted income is above £260,000. Then reduce the £60,000 allowance by £1 for every £2 of adjusted income above £260,000. The allowance cannot fall below £10,000.

How much can I pay into a pension and get tax relief?

Personal contributions get relief up to the higher of £3,600 gross and your relevant earnings for the year. Total pension input, including employer contributions, is tested against the annual allowance. Excess above the allowance and any carry forward is taxed.