Pensions might not be the most exciting topic, but they are a key area where many people make costly mistakes. In the latest episode of the Tax Compass Podcast, Laura and Simon from LSR Partners uncover the complexities of UK pension tax relief — and why getting it wrong could cost you thousands.

If you’re a high earner or contributing regularly to a pension, understanding the rules around tax relief is essential. In this post, we’ll explain how pension tax relief works, the common pitfalls, and how to avoid over-contributing.

How Pension Tax Relief Works

There are three main ways you can contribute to a pension and receive tax relief:

1. Employer Contributions

If your employer makes contributions to your pension, the payment is not considered part of your taxable income. This means you receive tax relief automatically, without needing to do anything.

2. Salary Sacrifice

With salary sacrifice, your employer reduces your taxable salary and makes a pension contribution instead. This reduces your overall tax bill and increases the amount going into your pension.

3. Relief at Source

If you make contributions to a ‘relief at source’ scheme, you contribute 80% of the total amount, and your pension provider claims the additional 20% directly from HMRC.

For example, if you contribute £8,000, HMRC will add £2,000, giving you a total pension contribution of £10,000. However, if you’re a higher or additional rate taxpayer, you may need to claim the extra relief through your tax return or by adjusting your tax code.

The Problem with Over-Contributing

One of the biggest issues LSR Partners sees is clients unknowingly contributing too much to their pension. This happens because of the Annual Allowance — the maximum amount you can contribute to a pension each year while still benefiting from tax relief.

Current Annual Allowance Rules

• The current annual allowance is £60,000 per tax year.
• If your adjusted income (including salary and employer contributions) exceeds £260,000, your annual allowance begins to taper.
• For every £2 of adjusted income over £260,000, you lose £1 of annual allowance.
• Once your adjusted income reaches £360,000, your annual allowance reduces to just £10,000.

Example:

If your adjusted income is £300,000 (which is £40,000 over the £260,000 threshold), you will lose £20,000 of your allowance — reducing it from £60,000 to £40,000.

Listen to, and watch the new Tax Compass podcast here

What Happens If You Over-Contribute?

If you exceed your annual allowance, you’ll face an Annual Allowance Charge at the end of the tax year. This means you’ll need to pay tax on the excess contribution at your highest marginal tax rate.

For example:

• If you earn £300,000 and contribute £60,000 to your pension, your allowance reduces to £40,000.
• The £20,000 overpayment would be taxed at 45%, leaving you with a £9,000 tax bill.

Many high earners find themselves with unexpected tax charges because they didn’t realise their allowance had been tapered.

Pension Providers Can Cover the Charge — But Act Fast

In some cases, pension providers can cover the annual allowance charge directly from your pension fund. However, there’s usually a time limit for notifying them.

If you miss the deadline, you may need to pay the tax charge yourself. LSR Partners regularly helps clients resolve these issues, but it's better to avoid them altogether through careful planning.

Why Getting Tax Relief Matters

Some people assume that contributing to a pension — even without tax relief — is still a good savings strategy. However, this is often a mistake.

Example:

• You invest £100,000 into a unit trust, which grows to £120,000. You’ll pay tax only on the £20,000 gain.
• If you invest the same £100,000 into a pension without tax relief, you’ll be taxed on the full £120,000 when you withdraw it.

That means you’re being taxed as if you had received tax relief — even though you didn’t.

Bottom line: Never put money into a pension if you’re not getting tax relief. If you like the funds in your pension, ask your provider if you can access them through an ISA or other tax-efficient vehicle.

Tapering, Over-Contributions, and the Political Impact

Pensions have become a political issue in recent years. Governments frequently adjust pension rules to manage tax revenues and workforce behaviour.

For example:

• The lifetime allowance was abolished, but there are rumours it could return.
• Tapering rules have led to early retirements among NHS consultants, prompting the government to remove the cap.
• Future governments could change the rules again — making pension planning even more complex.

Real-World Case Study

LSR Partners recently helped a client who had been over-contributing to her pension for several years. After a detailed review of her past contributions, it turned out that her unused allowance from previous years had expired.

She had exceeded her allowance by £12,000, resulting in a £4,500 tax bill. Despite this being a genuine mistake, HMRC imposed both penalties and interest.

This case highlights why understanding pension rules — and seeking expert advice — is very important.

Get Expert Advice Before You Contribute

Pension planning is complex, but LSR Partners is here to help. Our team regularly advises high earners and expats on pension contributions, tax relief, and compliance with HMRC rules.

Before you make any large contributions, speak to a tax expert. We’ll help you navigate the system, avoid penalties, and maximise your pension benefits.

Need advice on pensions? Contact LSR Partners today to arrange a consultation.

Book a consultation today – We’ll help you pay the right tax, in the right place, at the right time.

Listen Now

Listen to the latest episode of The Tax Compass Podcast here.

At LSR Partners, we’re here to ensure you pay the right tax, in the right place, at the right time. Book a consultation with us today to learn how we can support your journey.