UK pension contributions attract income tax relief at the contributor's marginal rate. That principle is simple. The mechanics by which the relief actually reaches the pension are not — three different methods are in use, they produce slightly different cash flows, and several percent of higher-rate taxpayers fail to claim relief they are entitled to because they do not understand the system. This article walks through how each one works.
Method 1: Relief at Source (RAS)
Used by most personal pensions, SIPPs, and group personal pensions. The contributor pays a net amount; the scheme provider then claims 20% basic-rate tax relief from HMRC and adds it to the pot. So £80 contributed by the saver becomes £100 in the pension after relief.
Higher-rate (40%) and additional-rate (45%) taxpayers must claim the extra 20% or 25% relief through their Self Assessment return. This is the single biggest source of unclaimed tax relief in the UK pensions system — millions of higher-rate taxpayers contribute via RAS schemes without ever claiming their additional relief. The result is a refund that can run to thousands of pounds per year.
Method 2: Net Pay Arrangement (NPA)
Used by many occupational schemes and most public-sector pensions. The employer deducts the contribution from gross pay before calculating income tax. Relief is therefore given automatically at the contributor's marginal rate — basic, higher, or additional — and nothing further needs to be claimed.
Net Pay is more efficient for higher-rate taxpayers (no Self Assessment needed) but historically penalised low earners who did not pay income tax — they got no relief at all on contributions deducted from gross. From 2025-26 HMRC pays a top-up to net pay scheme members earning below the personal allowance to put them on the same footing as RAS savers.
Method 3: Salary Sacrifice
The most efficient mechanism by some distance. The employee gives up part of their salary in exchange for an employer pension contribution. Because the sacrificed amount never appears as salary, it is not subject to income tax or National Insurance — saving both employee NIC (8%) and employer NIC (15% from April 2025) in addition to the standard tax relief.
For a higher-rate taxpayer earning £80,000, sacrificing £5,000 of salary into pension saves £2,000 income tax plus £400 employee NIC plus £750 employer NIC — total £3,150 of NIC and tax saving on a £5,000 contribution. The employer can pass some of that 15% saving back to the employee as additional pension funding. We cover this in detail in our article on salary sacrifice.
Why the method matters
Two employees making the same gross contribution into the same employer's scheme can end up with materially different cash positions depending on the relief mechanism in use:
- RAS: cash out today is highest, but higher-rate relief must be reclaimed manually.
- NPA: cash out today is lower (full relief already given), no Self Assessment needed.
- Salary sacrifice: cash out today is lowest (also avoids employee NIC), pension contribution highest.
For an annual contribution of £5,000 by a higher-rate taxpayer the difference between RAS without claiming higher-rate relief, and salary sacrifice with NIC savings shared, can exceed £2,000 in real cash flow.
What employers must communicate
The Pension Schemes Act and FCA rules require schemes to disclose their relief mechanism in joining materials. In practice this disclosure is buried in scheme booklets that most employees never read. We routinely find clients running RAS schemes where 80% of higher-rate taxpayers have never claimed their additional relief.
How PushDigits helps
For payroll clients, we configure relief mechanisms correctly in the payroll software so contributions reach the scheme in the right form. For Self Assessment clients, we check every year whether higher-rate relief has been claimed on RAS contributions — and reclaim it where it has been missed, sometimes for up to 4 prior tax years.
If you are a higher-rate taxpayer and you have never explicitly claimed pension tax relief on your tax return, there is a strong chance HMRC owes you money. Book a Self Assessment review with PushDigits or contact us via our contact page.