Tax efficient

The money you save into your pension comes from your salary. There are different ways to make your contributions and they impact the tax savings you make. Your pension will either work on a:

  • salary sacrifice basis - this means you exchange salary for pension contributions, or
  • non-salary sacrifice basis - where your contributions are taken after you pay tax and National Insurance (NI).

If you're unsure which way you make your contributions you can check with your employer.

Salary sacrifice means you exchange salary for pension benefits. As your salary is reduced you normally pay less tax and NI. The salary you exchange, and the tax and NI saving you make, go straight into your pension pot as you can see below for a 20% rate taxpayer paying 10% NI.

If you exchange salary for pension contributions, it could affect any future state or salary-related benefits or entitlements. Please speak to your employer about how this may affect you.

If your plan works on a non-salary sacrifice basis, your employer takes your contribution from your salary after you’ve been taxed. For example, if you're a 20% rate taxpayer and your employer has taken £80 from your net pay, Prudential will claim back £20 from HM Revenue & Customs, so there is a total of £100 going into your pension as you can see below.

If you're a higher rate taxpayer, you can claim further tax relief through your self-assessment tax return. You can receive tax relief on up to the higher of £3,600 or 100% of your earnings.

Income tax on pension savings

The total amount of tax relief you get on your pension savings is limited. It's important you're aware of the 'Important information about pensions allowances' and how they impact you. The UK Government may change these allowances from time to time so do check their website to see if there have been any changes. If you think you might be affected, you can get more information from the HM Revenue & Customs website.

If you're a member of a salary sacrifice arrangement, please speak to your employer about how this may affect you.

The tax you pay will depend on your circumstances and rules can also change.

Your rate of income tax

Any contributions made by salary sacrifice are deducted from your earnings before your tax bill is worked out so the amount of income tax you pay will be based on what's left. Any other contributions are paid from your net pay after tax has been deducted and Prudential claim back basic rate tax relief on these contributions.

If you're a Scottish taxpayer, you'll pay tax based on the Scottish rate of income tax and tax bands. For more information on Scottish income tax, visit www.gov.uk/scottish-rate-income-tax.

If you're a Welsh taxpayer, you'll pay tax based on the Welsh rate of income tax and tax bands. For more information on Welsh income tax, visit www.gov.uk/welsh-income-tax.

More information

Your pension

During your working life, it's important to consider your retirement and the ability to enjoy life when you reach retirement. Saving into your workplace pension could help you do just that.

Your contributions

One of the benefits of your pension scheme is that your contributions are flexible. You can contribute as much as you like into your pension, although the total amount of tax relief you get on your pension savings is limited.

Investment choices

You may have a few options when it comes to investing your money.

Taking your money

Life isn't always as simple as we'd like it to be. Some things take us by surprise and those surprises can cost money. Your circumstances will change over time and so may the lifestyle you expect to have when you retire.

Auto-enrolment

Auto-enrolment is a UK Government initiative aimed at helping more people save for the future through a workplace pension.

Salary sacrifice

This is an example of how salary sacrifice might work.

Non-salary sacrifice

This is an example of how non-salary sacrifice might work.