Quick answer
Where contributions come from
Every time you are paid, contributions are deducted from your salary and paid into your pension pot. Your employer adds their contribution on top, and the government adds tax relief. All three amounts go into your pot and are invested on your behalf.
This three-way contribution is one of the most powerful features of a workplace pension. It means that for every pound you put in, you are getting additional money from your employer and the government, effectively amplifying the impact of your own saving.
How qualifying earnings work
Under auto-enrolment, contributions are calculated on your qualifying earnings, the band of earnings between £6,240 and £50,270 per year (2024/25 figures). This means contributions are not calculated on your total salary, but on the portion that falls within this band.
For example, if you earn £30,000 per year, your qualifying earnings are £30,000 minus £6,240 = £23,760. The minimum 8% contribution is calculated on £23,760, not on your full £30,000 salary.
Some employers choose to calculate contributions on total earnings or basic pay rather than qualifying earnings. This can result in higher contributions. Check your pension documentation or ask your HR team to confirm how your contributions are calculated.
Employee and employer contributions
The minimum employee contribution under auto-enrolment is 5% of qualifying earnings. However, because of tax relief, you only actually pay 4% yourself, the government adds 1% on top through basic-rate tax relief.
The minimum employer contribution is 3% of qualifying earnings. Many employers contribute more than this, and some offer enhanced contributions as part of their benefits package. It is worth checking what your employer offers, you may be leaving money on the table if you are only contributing the minimum.
Tax relief explained
Tax relief is the government's way of encouraging pension saving. When you contribute to a pension, you receive relief at your marginal rate of income tax.
For basic-rate taxpayers (20%), this means that for every £80 you contribute, £100 goes into your pension, the government adds £20. For higher-rate taxpayers (40%), the benefit is even greater: £60 of your money becomes £100 in the pension, with the government adding £40. Additional-rate taxpayers (45%) receive even more generous relief.
How tax relief is applied depends on the type of scheme. Most workplace pensions use a relief at source method, where contributions are deducted from your net pay and the pension provider claims the basic-rate relief from HMRC. Higher-rate and additional-rate taxpayers need to claim the additional relief through their self-assessment tax return.
Steve's observation
Tax relief is one of the most underappreciated aspects of pension saving. I regularly meet higher-rate taxpayers who don't realise they can claim additional relief through their tax return, effectively meaning the government is paying 40% of their pension contributions.
If you are a higher-rate taxpayer and you are not claiming the additional relief through self-assessment, you are leaving money on the table. It is worth checking this every year, the amounts can be significant, especially if you have been contributing for several years without claiming.
Salary sacrifice
Salary sacrifice is an arrangement where you agree to give up part of your salary in exchange for your employer making a higher pension contribution on your behalf. Because your salary is reduced, you pay less income tax and National Insurance on the sacrificed amount, and your employer also saves on their National Insurance contributions.
Salary sacrifice can be more tax-efficient than standard contributions, particularly for National Insurance savings. However, it can affect other salary-linked benefits such as mortgage affordability assessments, life cover and state benefits. It is worth understanding the full picture before opting in.
Employer matching
Many employers offer enhanced matching, where they agree to increase their pension contribution if you increase yours, up to a specified limit. For example, an employer might offer to match any additional contributions you make up to an extra 3% of salary.
Employer matching is effectively free money. If your employer offers it and you are not taking full advantage, you are leaving part of your pay package unclaimed. Check your employee benefits documentation or ask your HR team what matching your employer offers.
Increasing your contributions
You can usually increase your contributions at any time by contacting your pension provider directly or by asking your employer to adjust your payroll deductions. Even small increases can make a significant difference over time, particularly when combined with investment growth and employer matching.
Pause for thought
- Do you know exactly how much you and your employer are contributing to your pension each month?
- Are you contributing enough to receive your employer's full matching contribution?
- If you are a higher-rate taxpayer, are you claiming the additional tax relief through self-assessment?
- Does your employer offer salary sacrifice? If so, have you considered whether it would benefit you?
- When did you last review your contribution level? Has your salary increased since you last set it?
Coaching point
Key terms
Frequently asked questions
What to do next
Check your current contribution level and compare it to what your employer offers in terms of matching. If you can afford to increase your contributions, even by 1%, consider doing so, particularly if it unlocks additional employer contributions.
Guide 5 explains pension tax relief in more detail, including how to claim additional relief if you are a higher or additional-rate taxpayer.