Pension contributions and statutory pay entitlements are two of the most misunderstood areas of UK employment finance — not because the rules are unclear, but because they change every tax year and rarely get explained in plain language. This guide covers pension tax relief, the Annual Allowance, and the three core statutory payments every UK employee should understand: Sick Pay, Maternity Pay, and Holiday Pay, all updated for the significant reforms that took effect in April 2026.
Every pound you contribute to a pension attracts tax relief at your highest rate of Income Tax — effectively, the government adds back the tax you would otherwise have paid on that money. How this relief is delivered depends on the type of pension arrangement:
| Method | How relief is given |
|---|---|
| Relief at source | You pay 80% of the contribution; the provider claims 20% back from HMRC automatically. Higher/additional rate taxpayers claim the rest via Self Assessment |
| Salary sacrifice | Contribution comes out of gross salary before tax and NI — you get full relief immediately, plus save on National Insurance |
| Net pay arrangement | Contribution comes out of gross pay before tax is calculated — full relief happens automatically, common with workplace pensions |
For a higher rate taxpayer contributing £3,000 to a relief-at-source pension, basic rate relief of £750 is added automatically, bringing the total pension contribution to £3,750. But because they pay tax at 40%, they’re entitled to a further £750 back — usually claimed through Self Assessment or a tax code adjustment — meaning the true cost to them is only £2,250 for a £3,750 pension contribution.
This extra relief is genuinely easy to miss if you’re not aware it exists — many higher rate taxpayers using relief-at-source pensions never claim the additional relief they’re owed simply because it isn’t automatic. Our Pension Tax Relief Calculator shows exactly how much relief you should be receiving based on your contribution method and tax band.
There is a limit to how much you can contribute to pensions each tax year while still receiving tax relief. For 2026/27, the standard Annual Allowance is £60,000, covering your own contributions, employer contributions, and any third-party contributions combined across all your pension schemes.
High earners face a reduced allowance under the tapered Annual Allowance rules. If your threshold income exceeds £200,000 and your adjusted income exceeds £260,000, your allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000 (reached once adjusted income hits £360,000).
There’s also the Money Purchase Annual Allowance (MPAA) of £10,000, which applies if you’ve already flexibly accessed a defined contribution pension (for example, taken income drawdown beyond your 25% tax-free lump sum). This exists to prevent "pension recycling" — withdrawing money and immediately re-contributing it for a second round of tax relief.
If you exceed your allowance, you face an Annual Allowance tax charge on the excess at your marginal rate. The good news is carry forward: you can use unused allowance from the previous three tax years (2023/24, 2024/25, 2025/26), provided you were a pension scheme member in each of those years. Our Pension Annual Allowance Calculator works out your exact allowance, factors in tapering and the MPAA, and flags whether a tax charge applies.
Statutory Sick Pay changed significantly from 6 April 2026 under the Employment Rights Act 2025, and the changes genuinely benefit employees:
The 80% cap is a genuinely new mechanic — previously SSP was simply a flat rate regardless of earnings. Now, low earners receive 80% of their average weekly earnings rather than the full £123.25, while anyone earning above roughly £154/week receives the full flat rate. Our Statutory Sick Pay Calculator works out the exact daily and total SSP due based on your qualifying days and earnings.
Statutory Maternity Pay (SMP) is paid for 39 weeks out of the 52 weeks of statutory maternity leave you’re entitled to, structured in two stages:
| Period | Rate |
|---|---|
| First 6 weeks | 90% of average weekly earnings, uncapped |
| Remaining 33 weeks | Lower of £194.32/week or 90% of average weekly earnings |
For most earners above roughly £216/week, the flat rate of £194.32 applies for weeks 7–39, since 90% of their earnings exceeds that figure. To qualify, you need at least 26 weeks of continuous employment with your employer by the "qualifying week" (15 weeks before your due date), and average weekly earnings at least at the Lower Earnings Limit.
The final 13 weeks of the 52-week entitlement are unpaid unless your employer offers enhanced maternity pay on top of the statutory minimum — worth checking your contract, as many employers do offer more generous terms. If you don’t qualify for SMP (for example, insufficient continuous employment), you may be able to claim Maternity Allowance instead, a similar payment made directly by the government. Our Maternity Pay Calculator works out your exact SMP over the full 39-week period based on your average weekly earnings.
Every UK worker is entitled to a minimum of 5.6 weeks of paid holiday per year, capped at 28 days even for those working more than 5 days a week. For fixed-hours workers this is simple: multiply your days worked per week by 5.6 to get your entitlement in days — a 5-day-a-week worker gets 28 days, a 3-day-a-week worker gets 16.8 days.
For irregular hours and zero-hours workers, where a fixed weekly pattern doesn’t exist, holiday accrues using the 12.07% method — this figure comes from 5.6 weeks of holiday divided by the 46.4 remaining working weeks in a year. In practice, this is often paid as "rolled-up holiday pay," an extra 12.07% added to every payslip rather than paid separately when leave is taken, which is a legally permitted approach for irregular hours workers.
For example, a zero-hours worker who worked 1,200 hours in a year at £15/hour accrues 144.8 hours of holiday (12.07% of 1,200), worth £2,172 in holiday pay. Our Holiday Pay Calculator handles both fixed-hours and irregular-hours calculations, switching between the two methods automatically.
One detail that catches people out: statutory payments like SSP and SMP are based on your average weekly earnings, which is typically your gross pay before pension deductions in most calculation methods, but employers should check their specific scheme rules. If you salary sacrifice a large proportion of your pay into your pension, this can reduce your average weekly earnings figure and, in turn, the statutory pay you’re entitled to during sickness or maternity leave — worth being aware of if you’re considering increasing pension contributions shortly before a planned leave period.
Separately, workplace pension contributions continue to accrue during paid statutory leave in most cases — employers are generally required to maintain pension contributions based on your normal salary (not just the reduced statutory payment) during maternity leave, which is a valuable but often overlooked entitlement. If you're planning parental leave, it's worth confirming with your employer exactly how pension contributions will be handled during your absence.
Because pension rules and thresholds are reviewed and sometimes changed at each Budget, it is worth revisiting your pension position at least once a year rather than assuming last year’s plan still fits. A simple annual check: confirm your current Annual Allowance (checking whether tapering applies if your income has risen), review whether you are claiming the full tax relief you are entitled to (particularly if you are a higher or additional rate taxpayer using a relief-at-source scheme), and check whether unused allowance from previous years could be used via carry forward if you are planning a larger one-off contribution. None of this requires a financial adviser to check — the calculators in this guide give you the figures in a couple of minutes, though a qualified adviser is worth consulting before making significant contribution decisions.
For employees, understanding these entitlements means knowing what you’re owed if you fall ill, take maternity leave, or want to check your holiday allowance is being calculated correctly — especially important given how recently and significantly the SSP rules changed. For employers, getting these calculations right isn’t optional: underpaying statutory entitlements is a compliance failure that can result in employment tribunal claims, and the SSP reforms in particular caught many payroll systems unprepared, since the day-one entitlement and removal of the earnings threshold represent a genuine structural change rather than a simple rate uprating. Reviewing your calculations against the current 2026/27 rules, rather than assuming last year’s process still applies, is worth the ten minutes it takes.
Relief is given at your highest rate of Income Tax — 20% basic rate, 40% higher rate, or 45% additional rate. With relief-at-source pensions, only the basic 20% is added automatically; higher and additional rate taxpayers must claim the rest via Self Assessment.
£60,000 standard allowance, tapered down to a minimum of £10,000 for high earners with adjusted income above £260,000, or reduced to £10,000 if the Money Purchase Annual Allowance applies.
£123.25 per week, or 80% of average weekly earnings, whichever is lower — paid from the first day of sickness following the April 2026 reforms, with no minimum earnings requirement.
90% of average weekly earnings for the first 6 weeks, then the lower of £194.32/week or 90% of average weekly earnings for the remaining 33 weeks, giving 39 weeks of paid leave in total.
Using the 12.07% accrual method — holiday entitlement equals 12.07% of hours actually worked, often paid as rolled-up holiday pay added to each payslip.
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Figures shown are estimates based on 2026/27 HMRC and DWP rates and are intended as a guide only. They do not constitute financial, tax, or employment law advice. Always verify with HMRC, ACAS, or a qualified adviser for your specific circumstances.