Guide · Retirement
UK Workplace Pensions Explained: Contributions, Tax Relief, and the Annual Allowance
Your workplace pension combines your own contributions, employer money, and a tax top-up from HMRC — but the rules around allowances and tax-free cash catch a lot of people out.
How the three sources add up
A typical workplace pension contribution has three parts: what you pay in, what your employer adds, and the tax relief HMRC effectively contributes by not taxing that portion of your income. On a £45,000 salary contributing 5% with a 4% employer match:
The annual allowance
The standard annual allowance for 2025/26 and 2026/27 is £60,000 — covering your contributions, your employer's, and any tax relief, combined, across all your pensions. High earners (broadly those with income over £260,000) face a tapered allowance, down to a minimum of £10,000.
Tax-free cash at retirement
When you access your pension, you can normally take up to 25% as a tax-free lump sum, capped at the Lump Sum Allowance of £268,275. The rest is taxed as income as you draw it, whether through an annuity, drawdown, or further lump sums.
| Pot Size | 25% Tax-Free Cash | Capped At |
|---|---|---|
| £200,000 | £50,000 | £50,000 |
| £800,000 | £200,000 | £200,000 |
| £1,200,000 | £300,000 | £268,275 |
Frequently asked questions
Am I automatically enrolled into a workplace pension?
Under auto-enrolment, UK employers must enrol eligible employees (aged 22 to State Pension age, earning over £10,000/year) into a workplace pension, contributing a minimum of 8% combined (at least 3% from the employer) unless you actively opt out.
What's the difference between 'net pay' and 'relief at source'?
Under a net pay arrangement, your contribution comes out of gross salary before tax, so relief happens automatically at your marginal rate. Under relief at source, you contribute from after-tax pay and the pension provider claims 20% basic-rate relief on your behalf — higher and additional rate taxpayers must claim the rest via Self Assessment.
What happens if I exceed the annual allowance?
Contributions above the £60,000 annual allowance (or your tapered allowance if you're a high earner) lose their tax relief and may trigger an annual allowance charge, effectively taxing the excess at your marginal rate. Unused allowance from the previous 3 tax years can sometimes be carried forward.
Can I access my pension before retirement age?
Generally no — UK pensions can normally only be accessed from age 55 (rising to 57 from 2028), except in cases of serious ill health. Accessing it early outside these rules can trigger a heavy unauthorised payment tax charge.