Make your pension work harder: Optimise your contributions
Dominic Thackray · Posted on: August 29th 2025 · read
If you’re already paying into your pension, whether through your employer, your own business, or personally, you’re taking an important step toward securing your financial future. But simply contributing isn’t enough - the way you make those contributions can significantly affect how much money you’ll have in retirement.
The UK pension system offers generous tax benefits to encourage saving for later life. However, many people will miss out on the full savings available over the course of their working life, as they won’t be aware of how to make contributions in the most efficient way – for instance, they may not know the different methods available, or they may overlook how financial planning and investment strategies can boost long-term growth.
Maximising your pension contributions isn’t just about putting in more money, it’s about making what you do save, work harder for you. Whether you’re an employee, a company director, or self-employed, the right approach could help you.
Three key factors to improve the long-term returns of your pension contributions are:
Making the most of available tax reliefs
There are several ways to make contributions depending on your circumstances, and some are more tax-efficient than others.
Keeping an eye on costs
Understanding the fees you pay on your pension funds is crucial, as even small differences can add up over decades.
Choosing the right investment strategy
The return on your contributions depend on how your pension is invested, and different strategies carry different costs and risks.
Are your pension contributions efficient?
There are a few ways of making efficient contributions to a pension, dependent on your circumstances:
For PAYE employees
Salary exchange – this is an agreement between you and your employer where you give up part of your gross salary and in return, your employer pays that amount directly into your pension on your behalf, along with their usual employer contribution.
As an employee you pay less National Insurance, as does your employer (with this recently upped to 15%)
You don’t have to complete a tax return to claim higher rates of tax relief where applicable.
Your employer may even choose to give part of their Employer National Insurance saving back as additional pension contributions.
Relief at source – this is more typical for smaller employers or for lower earners, and in most cases, is not quite as efficient as Salary Exchange:
You contribute to your pension from your net pay (after tax)
Your pension provider claims back basic-rate tax relief (20%) from HMRC and adds it to your pension pot. Example: If you want to contribute £100, you only pay £80, and HMRC tops it up by £20.
If you are a higher or additional rate taxpayer, you need to complete a tax return for the additional tax relief to be paid back to you directly.
If you are a non-taxpayer, you still get your basic rate tax relief added when making contributions, so in this circumstance it is more tax efficient than Salary Exchange.
Wealth Management
Read more about Wealth ManagementRead moreSalary Exchange is not applicable if you earn near the minimum wage, and it is not something that your employer has to offer as part of your employment contract.
Did you know? 6 out of 7 higher rate taxpayers that pay into a pension, withdraw from their pension at only basic rate tax in retirement (along with up to 25% tax free cash!)
At current rates, a higher rate taxpayer receives 40% tax relief when paying into the pension, tax free growth on investments, and pays an average rate of 15% tax on withdrawals in a large part of retirement (assuming that State Pension uses your personal allowance). If you retire earlier, the effective rate could be even lower in some years!
Company directors
As a director, you can make employer contributions to your pension, paid directly from your company’s profits.
These contributions may be treated as an allowable business expense, reducing your corporation tax.
These are not limited by your salary - just by your annual pensions allowance.
No National Insurance or income tax is payable on these contributions, making it an attractive way to extract profits.
Self-employed individuals, partners, or those looking to make personal contributions outside of their workplace pension
You can make payments directly into a personal pension, stakeholder pension, or SIPP (Self-Invested Personal Pension).
You can contribute if you're not employed (up to a limit of £3,600 a year).
Tax reliefs are available on contributions up to 100% of your annual earnings, capped by the annual pensions allowance.
You receive marginal rate tax relief by making pension contributions - basic rate tax relief is claimed by the pension provider and added to your pension, and higher rates claimed and rebated via your tax return.
Pensions for Non-Earners
As an example of someone earning £80,000 a year and making £10,000 in personal contributions to their pension:
As a higher rate taxpayer, you then complete a Self-Assessment Tax Return to claim back your higher rates of tax relief.
Additional considerations
As we’ve seen in this article, the most efficient way of paying in to your pension will vary depending on your circumstances. Professional advice should be sought if you are trying to understand what is best for your circumstances.
- Given that some ways of paying pension contributions can reduce gross income, it could also be a useful tool for allowing you qualify for certain benefits like Child Benefit Allowance, Government funded childcare, as well as reclaiming Personal Allowances, or reducing tax on certain chargeable tax events that can occur on some types of investment. This could give you an even higher rate of effective tax relief than just your marginal rate.
- Personal contributions are subject to earnings and annual allowances, and employer contributions are subject to annual allowances. There is a complexity here that pension allowances will vary depending on earnings, and unused annual allowances can be carried forward from the previous three tax years in most circumstances. There are penalties for breaching annual allowances, so when making large pension contributions (or small ones if you have over £200,000 income from all sources) it’s worth speaking to a Financial Adviser and your Tax Adviser.
Did you know? It’s possible to make contributions to someone else’s personal pension, and they get tax relief at their marginal rate. You could contribute surplus income to your children’s pension for example – you won’t get the tax relief yourself, but they can claim the tax relief at their marginal rates and if they are a non-taxpayer, the contribution still attracts basic rate tax relief in the pension, at £0.25 added for every £1.00 contributed!
How we can help you
Should you wish to understand more about pensions and how to optimise your contributions for maximum savings, or to discuss other investment and financial planning needs, please contact a member of the MHA Wealth team for further guidance,
For more information
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This is a marketing communication for general information only, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.
This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are therefore recommended to seek professional regulated advice before taking any action.
