Is it fair to tax my pension income?

19 August 2016


I am over 60, but I still contribute towards my pension savings. I do not get any tax relief because I don’t earn enough to pay income tax. When I retire, my pension income will be high enough to incur income tax. This doesn’t seem fair.

Is there anything I can do to recover the tax at that time? Or, as a low-paid worker, am I set to lose out twice?



I presume that the pension scheme that you are referring to is an ‘auto-enrolment’ pension, which your employer has set up for you.

There are two types of arrangements: a net pay scheme or a relief at source scheme. The type of scheme determines what you’ll see on your pay slip and your tax treatment.


With a net pay scheme, your employer takes your contribution from your pay before it’s taxed. 

You only pay tax on what’s left. This means taxpayers get full tax relief, no matter if they pay tax at the basic, higher or additional rate because the money is taken before tax is levied.

The amount you’ll see on your pay slip is your contribution plus the tax relief. Unfortunately, this means that you won’t get tax relief because you don’t pay tax.

In contrast, with a relief-at-source scheme your employer takes your pension contribution after taking tax and National Insurance from your pay. However much you earn, your pension provider then adds tax relief to your pension pot at the basic rate.

With ‘relief at source’, the amount you see on your pay slip is only your contributions, not the tax relief. If your employer had this system, then you would benefit from tax relief even if you are not currently a taxpayer.

In terms of what you can do, if your employer has set up a net pay scheme, then you will not be able to benefit from tax relief. However, you may be able to ask your employer to consider setting up a relief-at- source scheme, particularly if they employ a number of other people who are non-taxpayers.

You can get further information on the government’s website at or on The Pension Regulator’s website at

Once you start receiving your pension, there are ways you may be able to reduce the tax you pay. You could take amounts out of your pension pot in the form of a tax- free cash sum and an income. Only the income is taken into account when calculating if you pay tax.

You are allowed to take 25% of your pension pot tax-free, but you don’t have to take it all at once. You could take a lump sum each year to reduce what you take as income.


For example, if your state pension is £8,000 a year and you need another £2,000 a year income, you could take £500 as the tax-free cash sum and £1,500 as income. This would keep your income below the personal allowance and therefore free from income tax.