Do I need a pension scheme, and how are pensions taxed?

A freeview 'At a glance' briefing note designed to be used to chat through the issues with new clients.

At a glance

Do I need a pension scheme?

A pension is a tax-advantaged method of saving for retirement. This means that:

  • You receive tax relief when you make contributions into a tax approved scheme.
  • There are no taxable benefits or National Insurance Contributions (NICs) due when an employer makes contributions on your behalf.
  • Pension funds are tax-exempt and so your income grows within your fund tax-free.

There is an upper limit on the amount that you can contribute tax-free into an approved scheme each year.

On retirement, a pension may either be taken as a taxable lump sum, of which one quarter is tax-free, or you may draw it down gradually.


Maximum annual contributions that can be tax-relieved in recent years are:

  • From 2023-24 £60,000, tapered to £10,000 for incomes over £200,000.
  • From 2021-22 to 2022-23 £40,000, tapered to £4,000 for incomes over £200,000.
  • From 2020-21 £40,000, tapered to £4,000 for incomes over £200,000.
  • From 2016-17 £40,000, tapered to £10,000 for incomes over £110,000.
  • From 2013-14 £40,000.
  • From 2011-12 £50,000.

Unused allowances may often be carried forward from the previous three years, so greater contributions may be possible from the outset. 

Annual contributions may also be limited by your Relevant earnings

Lifetime allowances in recent years are:

  • From 2024-25 Nil
  • From 2021-22 to 2023-24 £1.0731 million 
  • From 2020-21 £1.0731 million.
  • From 2019-20 £1.055 million.
  • From 2018-19 £1.03 million.
  • From 2016-17 £1 million.
  • From 2014-15 £1.25 million.
  • From 2012-13 £1.5 million.

Pension schemes can be expensive to administer, but personal pension schemes may benefit from low charges. Self-Invested Pension Plans (SIPPs) are an alternative option: you select your own investments.

Employer schemes

Most employers are required to offer workplace pensions under Auto-enrolment

Companies may set up their own schemes. These can be approved schemes which means that they qualify with HMRC's requirements and are tax-advantaged. Unapproved schemes can also be an interesting alternative in remuneration planning.

Useful guides on this topic

Auto-enrolment: Workplace pensions
This guide looks at the key features of auto-enrolment, who is affected, what employers need to do, and the relevant timescales.

DIY Small Self-Administered Scheme 
An SSAS is similar to a Self-Invested Personal Pension (SIPP) scheme but does not require third-party providers and can be run solely by member trustees. We examine the details.

Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?

Pensions: Tax planning guides 
Index to our subscriber and freeview pension guides.

Employer-Financed Retirement Benefits Scheme (EFRBS)
An Employer-Financed Retirement Benefits Scheme (EFRBS or EFURB) is an unapproved pension scheme which means that it does not share quite the same tax advantages of a conventional occupational pension scheme

For more tax planning guides for directors see Tax planning for directors which has a summary of the latest tax guides & checklists which cover this topic area.

Squirrel ad

Are you enjoying our content? 

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register now to receive our FREE weekly SME Tax News update