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:
If you’re unsure which way you make your contributions, you can check with your employer.
Your contributions are taken from your pay before tax, so the money you'd normally pay as income tax automatically goes into your pension pot instead, as you can see below for a 20% rate taxpayer. If you pay tax at a higher rate, your tax savings will be higher. If you don't pay tax, you won't benefit from tax savings.
Salary sacrifice means you exchange salary for pension benefits. As your salary is reduced you normally pay less tax and National Insurance (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 12% 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.
The total amount of tax relief you get on your pension savings is limited so make sure you're aware of the 'Important information about pensions allowances'. The UK Government may change these allowances from time to time so check their website to see any changes which may impact you. 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.
Tax savings will depend on your individual circumstances and rules can also change.
As your contributions, including any paid by salary sacrifice, are deducted from your earnings before your tax bill is worked out, the amount of income tax you pay will be based on what's left.
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.
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.
Auto-enrolment is a UK Government initiative aimed at helping more people save for the future through a workplace pension.
As your pension is an investment, the value can go down as well as up and you might get back less than you put in.
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.
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.
This is an example of how salary sacrifice might work.
This is an example of how non-salary sacrifice might work.