How much should I be paying into my pension?
Key takeaways
Workplace pensions with employer contributions are mandatory if you're over 22 and earn more than £10,000
Pension contributions benefit from tax relief, meaning every £40 you contribute could grow to £80 in your workplace pension pot
How much should I contribute to my pension?
The amount of money you put into your pension will depend on your income, your budget, and how much money you will need in retirement.
Pensions UK publishes guidelines for what it thinks you should aim for, although these will be different for everyone. It says for a minimum standard of living in retirement you’ll need £13,900 if you’re single and £22.500 if you’re in a couple.
The amount you have in retirement will usually be made up of a workplace pension, the State Pension, any private pensions you’ve set up and any income you may have from savings or investments.
Everyone’s circumstances are different, but here are some common guidelines for pension contributions:
When you started saving into your pension
A common rule-of-thumb is to halve your age at the time you start saving for your pension. Aim to use that number as the percentage of your salary to save each year.
For example, if you started saving into your pension at 20, you should be saving 10% of your annual income into your pension. If you start saving into your pension at 40, this increases to 20%.
Based on your final salary
Another rule-of-thumb is that your income post-retirement should be between half and two-thirds of your final salary, depending on your circumstances.
Within the pensions industry, it is sometimes quoted that a good pension pot will be around 10 times your final salary.
This can sound like a big number, but the earlier you start putting money into your pension the longer your money will be invested and compounding – and hopefully have time to grow.
To get a clearer idea of what you might need to save now for a comfortable retirement read our retirement planning guide.
What are pension payment contributions?
Pension payment contributions are simply the amount of money you pay into your pension pot. Typically, if it is a workplace pension, both you and your employer will make monthly payments.
Sometimes you might make lump sum payments into your pension or a combination of regular and lump sum payments.
The reason it's called a contribution is that you're not the only one paying into your pension pot. If you're employed, then your employer is likely to also pay contributions into your workplace pension.
Not only that, but the government also contributes to the pot in the form of tax relief with most types of pension.
How do contributions to workplace pensions work?
Workplace pension contributions are a mixture of employee, employer and government contributions through tax relief.
If you're over the age of 22, earning more than £10,000 per year and working in the UK, your employer must automatically enrol you into the company's workplace pension scheme.
You have the option to opt-out if you want to, but it’s a legal requirement for employers to enrol you. If you choose to opt-out, you’ll lose the contributions that your employer makes.
What are minimum pension contributions?
The minimum total contribution for auto-enrolment is 8% of qualifying earnings, with at least 3% from the employer and the remaining 5% from your salary.
Employee contributions benefit from tax relief, effectively reducing the net amount deducted from your wages.
For example, if your gross contribution is £40, you’ll receive £10 in tax relief (assuming a basic tax rate of 20%). The employer adds £30, resulting in a total of £80 added to the pension pot.
It's important to note that the exact figures can vary based on individual circumstances, tax rates, and specific pension scheme rules.
How do pension contributions work if you’re self-employed?
Self-employed workers don’t benefit from auto-enrolment and there is no requirement for their employers to open a pension for them.
With that in mind, the onus is on the worker to contribute more to their pension so they have enough savedfor retirement. You can also still benefit from tax relief from the government.
Pension options for self-employed people include self-invested personal pensions (SIPP) and stakeholder pensions.
How does tax relief affect workplace pensions?
Tax relief is available on your workplace pension on contributions up to 100% of your salary (up to a maximum annual allowance of £60,000 per tax year). It is applied automatically by your pension provider in one of two ways:
Your employer may take pension contributions out of your pay before deducting Income tax (known as salary sacrifice)
If your contributions are paid after tax, then your pension provider will claim it as tax relief and add it to your pension pot. This is known as ‘tax relief at source’ and is common for private pensions that you have set up yourself
How do contributions on private pensions work?
You can make contributions into a private pension in any way you choose – subject to the pension provider's terms and conditions.
This might be regular monthly contributions, one-off lump sums – or a combination of the two.
Do I receive tax relief on my private pension contributions?
Yes, tax relief is available for private pension contributions. It is paid at your highest rate of income tax, so 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
Your pension provider will claim tax relief at 20% on your contributions in a private pension and add it to your pension pot automatically.
Higher and additional rate taxpayers have to claim the extra tax relief they are entitled to through a self-assessment tax return each year.
What is the pension annual allowance?
Your annual allowance is the most you can save into your pensions in a tax year (6 April to 5 April) before you have to pay any tax.
The maximum annual tax-free allowance for pension contributions is currently set by the government at £60,000. This means that you can contribute up to this amount before being taxed. However, you can carry over any unused allowance from the previous three years into any one year.
If you have a very high income, the amount you can save into your pension tax-free each year may be reduced. This applies if you earn over £200,000 and your total taxable income (including pension contributions) is more than £260,000. In this case, your allowance gradually decreases, but it won’t go below £10,000.
Personal Finance Expert
Our expert says...
“Saving for a pension might not feel like a priority, and small contributions can seem insignificant, but they add up. Thanks to tax relief and the investment growth, even modest savings can build into a substantial pot over time. The sooner you start, the better, but it’s never too late to make a difference.”
Other useful guides
We have a range of helpful guides and tools to help with your pension planning:
How do I start a private pension?
Setting up a private pension can be quick and simple online. But it is a good idea to take some time to do your research first.
You don’t need a financial adviser or broker to arrange a private pension. But getting expert and impartial advice is a good idea if you're not a confident or experienced investor – although this will come with an added cost.
Compare pension plans with our partner MoneyFarm
We've teamed up with our chosen partner MoneyFarm to help you find the right private pension plan. The service is hassle-free, easy to use and puts you in control of your pensions at all times.
MoneyFarm can help you track down and combine your old pensions (if it's in your best interests), and help you choose the best investment plan for you, using funds from the whole of the market. You will also get your own dedicated pension adviser to answer any questions you have.
Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please speak to a financial adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
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