Relief at source refers to the method by which your pension contributions are boosted by a rebate of the income tax you've already paid on those earnings, at the basic rate. Essentially, when you contribute to a pension scheme, the amount you contribute from your net income (after tax) is topped up by your pension provider with the basic rate tax you paid on it, which is 20%.
Here's how it works:
- If you contribute £80 from your net income into your pension, your pension provider claims back £20 from HMRC (which represents the 20% basic rate tax on your earnings) and adds it to your pension pot, so a total of £100 is invested.
- If you pay higher (40%) or additional (45%) rates of tax, you can claim the additional tax relief through your Self Assessment tax return. This means you could claim back an additional 20% or 25% respectively, but this part of the tax relief is not automatic and must be claimed by you.
Relief at source applies to personal and stakeholder pensions and some workplace pensions. It's different from the "net pay" arrangement, where your contributions are taken from your gross salary (before tax), meaning you automatically get full tax relief regardless of your income tax rate but without the need to reclaim anything from HMRC. If your employer uses a "salary sacrifice" scheme, your pension contributions are treated as an employer contribution, so the income tax and National Insurance contributions are reduced upfront.
