One of the most attractive features of pensions is the tax relief that is available. Tax Relief is 'free' money that is added to your pension pot as an incentive by the government. It is actually a refund of the income tax that you pay on your wages however you can still claim it even if you have paid no income tax in the first place!
If you are a basic rate taxpayer then you will receive a 20% enhancement to your pension contributions, courtesy of Her Majesties Revenue & Customs. So, for every £80 that you contribute, the pension provider will be able to claim a further £20 from HMRC.
Higher rate taxpayers are able to receive 40% tax relief although it is claimed slightly differently. For every £60 that is contributed, £20 will be claimed as per the example above, and a further £20 is reclaimed through self assessment at the end of the tax year.
Naturally, there are limits to how much tax relief can be claimed, although they are very generous. You may claim relief on contributions up to your annual pensionable earnings. If you wished to, you could pay your entire wages into your pension and reclaim all of your income tax. Even if you have no pensionable earnings you can still contribute up to £3,600 gross into your pension and reclaim basic rate tax relief.
It is also worth remembering that even if you only stray into the higher rate tax band by one pound, all of your pension contributions for that year can claim tax relief at 40%. This is commonly ignored by accountants who can be so obsessed with saving tax, that they often overlook the fact that the pension benefits can far outweigh the disadvantages of paying a little bit more income tax.