Pension Tax Relief Calculator Methodology

What this calculator does

Takes gross salary, pension contribution method (relief at source, net pay, or salary sacrifice), contribution amount or percentage, and tax band. Returns the effective cost of the contribution, total pension input, and an annual allowance check.

The formula

Relief at source:
  Employee pays:            contribution × (1 − basic rate) = contribution × 0.80
  Provider claims:          contribution × 0.20 from HMRC
  Higher rate relief:       (marginal rate − 20%) × gross contribution (via Self Assessment)
  Additional rate relief:   (45% − 20%) × gross contribution = 25%

Net pay arrangement:
  Contribution deducted from gross pay before tax.
  Full relief at marginal rate granted automatically.

Salary sacrifice:
  Reduces gross salary — saves income tax AND National Insurance (employee + employer).
  Effective cost = contribution × (1 − marginal income tax rate − NI rate)

Annual allowance (2025/26): lesser of £60,000 or 100% of earnings
Money purchase annual allowance (MPAA): £10,000
  (applies if you have flexibly accessed a defined contribution pension)

Tapered annual allowance:
  Threshold income > £200,000 AND adjusted income > £260,000
  Reduces by £1 per £2 of adjusted income above £260,000
  Minimum tapered allowance: £10,000

Assumptions

Relief at source calculation uses the standard 20% basic rate top-up claimed by the provider.
Higher and additional rate taxpayers must claim extra relief via Self Assessment.
Salary sacrifice NI saving uses employee NI at the applicable rate for the income level.

Data sources

Figure	Value used	Source	Last checked
Annual allowance	£60,000	HMRC — Pension annual allowance	May 2026
MPAA	£10,000	HMRC — Money purchase annual allowance	May 2026
Basic rate	20%	HMRC — Income Tax rates	May 2026
Taper threshold income	£200,000	HMRC — Tapered annual allowance	May 2026
Taper adjusted income	£260,000	HMRC — Tapered annual allowance	May 2026

Limitations

Does not model defined benefit pension inputs (the annual allowance test for DB schemes uses a notional factor).
Does not calculate the tapered annual allowance precisely — flags it as potentially relevant where incomes exceed the thresholds.
Does not model carry-forward of unused annual allowance from prior years.

Worked example

Higher rate taxpayer, £60,000 salary, contributes £500/month gross (£6,000/year) via relief at source.

Employee pays:                   £6,000 × 80% = £4,800/year
Basic rate top-up (by provider): £6,000 × 20% = £1,200
Additional 20% relief via SA:    £6,000 × 20% = £1,200

Total effective cost: £4,800 − £1,200 = £3,600/year
(£6,000 in pension for £3,600 out of pocket — 40p in the £1 for a higher rate taxpayer)

Changelog

Date	Change
May 2026	Initial publication

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Pension Tax Relief Calculator — Methodology