There are three broad types of pension in the UK: the State Pension, workplace pensions and personal pensions. Most people build up more than one over a career: a State Pension from your National Insurance record, plus a workplace pension from each employer you pay into.
The type sets how your pension is built and who pays in. A separate question, the contribution method, sets when the money leaves your pay, which is where take-home calculators most often go wrong. Both are covered below.
The Three Pension Types
| Type | Who pays in | How your income is set | Example |
|---|---|---|---|
| State Pension | You, via your National Insurance record | A flat rate set by the government each year | New State Pension |
| Workplace pension | You and your employer | Defined benefit: guaranteed, from pay and service. Defined contribution: depends on the invested pot | NHS Pension (DB), auto-enrolment (DC) |
| Personal pension | You, set up yourself | Depends on the invested pot and how you draw it | SIPP, stakeholder pension |
The State Pension
The State Pension is paid by the government when you reach State Pension age. What you receive is based on your National Insurance record, not your salary or any investments, and the full new State Pension is a flat rate set each year. It is the foundation the other pension types sit on top of.
Workplace Pensions
A workplace pension is arranged by your employer, who enrols you and pays in alongside you. There are two kinds:
- Defined benefit (DB) pays a guaranteed retirement income worked out from your pay and years of service. The NHS Pension Scheme is a defined-benefit, career-average scheme, as are most public-sector pensions.
- Defined contribution (DC) builds a pot from your and your employer’s contributions, which is invested; your eventual income depends on the pot and how you draw it. Most private-sector auto-enrolment pensions are defined contribution.
Personal Pensions
A personal pension is one you set up yourself, separate from any employer, for example a SIPP (self-invested personal pension) or a stakeholder pension. You choose the provider and the contributions, the pot is invested, and, like a defined-contribution workplace pension, your retirement income depends on how it grows. People often use one to top up a workplace pension or to save when self-employed.
Whatever type of pension you pay into, your contribution can be handled in one of three ways. The method sets when the money leaves your pay, which changes how much income tax, National Insurance and student loan you owe.
NET Pay
With a NET pay arrangement, your pension contribution is taken from your gross salary before income tax is calculated. This means pension lowers your taxable income, so you get full tax relief straight away.
However, National Insurance is still charged on your full gross. Student loan repayments are also based on your full gross.
Who uses it: The NHS, teachers, civil service, and most public-sector defined benefit pension schemes use NET pay.
Relief at Source
With relief at source, your pension contribution is taken from your pay after tax. Your pension provider then claims back basic-rate tax (20%) from HMRC and adds it to your pension pot.
If you pay higher-rate or additional-rate tax, you need to claim the extra relief yourself through your tax return or by contacting HMRC.
Who uses it: Most private-sector auto-enrolment schemes, including NEST and many workplace pensions, use relief at source.
Salary Sacrifice
With salary sacrifice, you agree with your employer to give up part of your gross salary. Your employer puts that amount into your pension instead. Because your contractual salary is lower, both income tax and National Insurance are calculated on the reduced figure.
Student loan repayments also fall, because they are based on the lower gross. Your employer saves on NI too, which is why many employers offer salary sacrifice as an option.
Who uses it: Many larger private-sector employers offer salary sacrifice alongside or instead of relief at source. It is less common in the public sector.
Impact Comparison
This table shows which deductions are reduced under each pension method.
| NET Pay | Relief at Source | Salary Sacrifice | |
|---|---|---|---|
| Reduces taxable income | ✓ | ✗ | ✓ |
| Reduces NI | ✗ | ✗ | ✓ |
| Reduces student loan | ✗ | ✗ | ✓ |
| Reduces adjusted net income | ✓ | ✓ | ✓ |
| Tax relief automatic | ✓ | ✗ | ✓ |
| Provider reclaims basic rate | ✗ | ✓ | ✗ |
Which Method Does My Employer Use?
Check your payslip or ask your HR team. If your pension is shown as a deduction before tax is calculated, you are likely on NET pay. If pension comes out after tax, check whether your provider is adding basic-rate tax relief. That means relief at source. If your contractual salary has been reduced and your employer pays a larger pension contribution, that is salary sacrifice.
NHS staff are on NET pay. Most private-sector auto-enrolment schemes use relief at source unless salary sacrifice has been offered. When using a take-home pay calculator, make sure you select the right method. The wrong choice can shift your result by hundreds of pounds a year.
Try It
Enter your salary into the take-home pay calculator and switch between pension methods to see how each one changes your tax, NI, and take-home pay.