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Lesson 7.4 · 4 of 5 · Tax, pensions and protection where you live

Pensions and tax relief in the UK: workplace pension and SIPP

A UK pension gets tax relief on what you pay in: the government tops up your contributions, and in a workplace pension your employer adds money too. In return, the money is locked until at least age 55, rising to 57 from 6 April 2028. Usually 25% comes out tax-free and the rest is taxed as income.

7 minBeginnerUpdated October 29, 2026
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Terms in this lesson

Compound interest
You earn on your past earnings too, not just on the amount you started with.
Index fund
A fund that buys every company in an index, in the same proportions.
Portfolio
All your investments in one place: stocks, ETFs, bonds, cash.

Opening question

You pay £80 into a personal pension that uses “relief at source”. With basic rate relief of 20%, how much ends up in your pension?

It does not matter if you get it wrong: trying first helps you remember.

Workplace pension and auto-enrolment in the UK

Definition

Who is enrolled automatically?

Workers aged 22 up to State Pension age who earn at least £10,000 a year.

Your employer must put you into a workplace pension and pay into it. The legal minimum is 8% of your “qualifying earnings”, the part of your pay between £6,240 and £50,270 a year. Your employer pays at least 3%, and you pay the rest, including tax relief. Many employers pay more than the minimum.

8%minimum in total
of which
3%at least from your employer

Minimum contributions under automatic enrolment.

Work it out

In the 2026/27 tax year you earn £28,000. Qualifying earnings are pay between £6,240 and £50,270, and the minimum total contribution is 8%. What is the minimum paid into your pension that year, in pounds?

£
A hint

Take £6,240 off your pay first, then work out 8%.

Check yourself

You opt out of your workplace pension to take home a bit more each month. What do you give up?

SIPP and personal pensions: how tax relief is added

Definition

What is a SIPP?

A personal pension where you choose the investments yourself.

A self-invested personal pension (SIPP) works like an investment account: you can hold funds, index funds, ETFs or shares. Inside it there is no tax on dividends or gains. With relief at source, the provider claims basic rate tax relief of 20% from HMRC and adds it, so what you pay is treated as if it came from your pay before tax. Higher and additional rate taxpayers claim the rest through Self Assessment.

Work it out

You are a higher rate taxpayer in England and pay £8,000 into a SIPP. The provider adds basic rate relief so the pension receives £10,000, and all £10,000 falls within income taxed at 40%. After you claim the extra 20% through Self Assessment, what has the £10,000 really cost you, in pounds?

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Pension (SIPP or workplace)for retirement

  • Tax relief on the way in
  • Employer contributions in a workplace scheme
  • 25% usually tax-free on the way out
  • Locked until 55, 57 from 6 April 2028
  • The rest is taxed as income when you take it

Stocks and shares ISAfor any goal

  • Money available at any time
  • Withdrawals are tax-free
  • No tax relief on what you pay in
  • Limit of £20,000 a year

Pension allowances and limits in the UK

LimitWhat it means
Tax relief limityour contributions get relief up to 100% of your earnings; with no earnings, up to £2,880 a year, which becomes £3,600 with relief
Annual allowance£60,000 a year in total, yours and your employer’s, before a tax charge; unused allowance from the previous 3 years can sometimes be carried forward
Money purchase annual allowancefalls to £10,000 once you start taking taxable money flexibly from a pension
Tax-free lump sumusually 25% of the pension, up to £268,275 in total

Very high earners have a lower, tapered annual allowance. In Scotland, the extra relief for higher rate taxpayers follows Scottish income tax bands.

Check yourself

You earn £25,000 a year and want to pay £40,000 into a SIPP from savings. On how much can you get tax relief?

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Myth or fact?

“Money in my SIPP is mine, so I can take it out whenever I need it.”

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What would you do?

You start a new job. Your payslip shows 5% going into the workplace pension, and money is tight this year. What do you do?

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What you learned

  • Auto-enrolment puts at least 8% of qualifying earnings into your pension, with at least 3% from your employer.
  • Basic rate tax relief of 20% is added, so what you pay in counts as if paid before tax; higher rate taxpayers claim more through Self Assessment.
  • The annual allowance is £60,000, and the money stays locked until at least 55 (57 from April 2028).

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Next lesson · 6 minUK FSCS protection

Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: GOV.UK, Workplace pensions, Tax on your private pension, Tax when you get a pension and Increasing normal minimum pension age; The Pensions Regulator, earnings thresholds 2026/27; Budget 2026, Annex A and Overview of tax legislation and rates (28 October 2026). Rules checked on 29 October 2026; your own situation may differ, so check MoneyHelper, GOV.UK or a regulated financial adviser.