How tax relief on pension contributions reaches a member, what it is worth at each rate, and how the annual allowance, salary sacrifice and the State Pension fit into the picture.
Primary source: Income Tax rates and allowances (GOV.UK).
Pension contributions attract tax relief because they are paid out of income that has not yet been taxed. The relief is worth the member's marginal rate, but the route it takes depends on the scheme.
Under a net pay arrangement the contribution is taken from pay before Income Tax is calculated, so the member gets relief at their marginal rate automatically. Under relief at source the contribution is paid from net pay and the scheme provider adds basic-rate relief to the pot, so a higher- or additional-rate member must claim the extra relief.
An employer must enrol eligible workers into a pension scheme and contribute to it. The member's contribution is taken from pay, and the employer's contribution is added on top of it. The scheme's rules decide whether the member's relief is given through net pay or at source.
Relief is worth the rate the contribution would otherwise have been taxed at. A basic-rate member gets 20% relief; a higher-rate member gets 40%; an additional-rate member gets 45%. Under relief at source the scheme adds only the basic-rate part to the pot, so a member paying above the basic rate has to claim the rest, usually through Self Assessment or by asking HMRC to adjust their code.
There is a limit on how much can be contributed to pensions across all schemes in a tax year while still attracting relief. The limit applies to the total of the member's own contributions and the employer's. Contributions above the limit can attract an annual allowance charge, which is collected through Self Assessment, and unused allowance can sometimes be carried forward from earlier years.
In a salary sacrifice arrangement the employee gives up part of their salary in return for an employer pension contribution. Because the sacrificed pay is never received, it is not subject to Income Tax or to employee National Insurance, and the employer may also save on employer National Insurance.
The State Pension is paid from National Insurance contributions and is taxable as income, although it is paid without tax being deducted at source. A private or workplace pension is paid from the pot built up over a working life. Both count towards total income when the Income Tax bands are applied, so a pensioner with both can find that part of their private pension falls into a higher band.