On £60,000 of profit in 2026/27, paying £4,000 into a personal pension puts £5,000 in the pot and cuts your Self Assessment bill by £1,000.00, so it costs you £3,000.
A sole trader in England with £60,000 of profit who pays £4,000 into a personal pension in 2026/27
| Profit | £60,000.00 |
| Taxable income (£60,000 less £12,570) | £47,430.00 |
| Income tax with the pension contribution | |
|---|---|
| £42,700 at 20% | £8,540.00 |
| £4,730 at 40% | £1,892.00 |
| Income tax | £10,432.00 |
| What the contribution cost | |
| Paid into the pension | £4,000.00 |
| Less the lower tax bill (£11,432.00 without the pension) | −£1,000.00 |
| Net cost of £5,000 in the pension | £3,000.00 |
England. A relief-at-source personal pension, paid into before 5 April 2027. All assumptions and rates
Assumptions and rates
- England. A relief-at-source personal pension, paid into before 5 April 2027.
- No other income, and the contribution is within the annual allowance and below 100% of earnings.
- The provider claims the 20% basic rate relief and adds it to the pot.
- £4,000 paid in becomes a £5,000 gross contribution
- Basic rate band extended by the gross contribution: £37,700 + £5,000 = £42,700
- Income tax 20% and 40%
Where does the first £1,000 come from?
Your pension provider claims 20% basic rate relief from HMRC and adds it to your pot. You pay in £4,000, which is treated as £5,000 with £1,000 of basic rate tax already taken off, and the provider claims that £1,000 back for you.
How does the second £1,000 reach me?
Through your tax return. The £5,000 gross contribution stretches your basic rate band from £37,700 to £42,700, so £5,000 of profit that would have been taxed at 40% is taxed at 20% instead. That 20% difference on £5,000 is £1,000 off your bill.
Without the pension, income tax would be £37,700 at 20% (£7,540.00) plus £9,730 at 40% (£3,892.00), which is £11,432.00. With it, the bill is £10,432.00.
Does it reduce my National Insurance?
No. Class 4 National Insurance is worked out on profit before pension contributions, so it stays at £2,456.60 on £60,000 of profit either way.
What if all my profit is in the basic rate band?
Then the 20% the provider adds is all the relief there is, and there is nothing more to claim on your return. £4,000 paid in still becomes £5,000 in the pot.
Is there a limit?
Relief is limited to contributions up to 100% of your earnings for the year. The annual allowance for 2026/27 is £60,000 of gross contributions. If you have no earnings, you can still pay in up to £2,880 a year and get relief on it.
Does the timing matter?
The contribution counts in the tax year you pay it. Paying in by 5 April 2027 reduces your 2026/27 bill, which is due on 31 January 2028. People with uneven income often wait until they can see the year's profit, then decide how much to pay in before 5 April.
What this doesn’t cover
- Workplace pensions using a net pay arrangement or salary sacrifice.
- Carrying forward unused annual allowance from earlier years.
- The tapered annual allowance for very high incomes.
- Scottish income tax rates, where the extra relief works out differently.
- Choosing a pension provider or investments.
Common questions
Yes. Higher rate relief is not added automatically. Enter the gross contribution on your Self Assessment return.
£5,000. For a relief-at-source pension the return asks for the payments plus the basic rate tax, which is the gross figure the band extension uses.
A short email before each deadline that costs money to miss, and when a new guide goes up.