Employees in company pension schemes can get tax relief on earnings invested to improve their pensions. Employees in older schemes will usually be in what are called defined benefit plans - that means that whatever they pay into the scheme they are guaranteed a benefit, or pension payment, of a set amount. Most schemes guarantee two-thirds of final taxable earnings but some offer just half of final salary.

For companies the disadvantage of these type of schemes is that it is difficult to calculate the cost. The employees' contribution is clear but the employer's contribution will vary according to investment performance of the fund and other factors such as the age of people joining the workforce.

Newer pension schemes generally operate as defined contribution plans. This means that the employee pays in a defined amount, say 5 per cent of salary, and the employer pays in an agreed amount, say 15 per cent of salary. But the employer does not guarantee the amount of the pension on retirement. That depends on how the investment fund performs.

If employees are concerned their pension scheme, either defined contribution or defined benefit, will not provide an adequate retirement income they can top up the provisions by making additional voluntary contributions (AVCs).

Employees who are members of a company pension plan will get tax relief for a total of up to 15 per cent of their taxable earnings invested in the plan including any additional voluntary contributions. An employee in a non-contributory pension plan with taxable earnings of £25,000 could put the entire 15 per cent allowance (£3,750) into AVCs. Tax would not be payable on this portion of income.

There are some restrictions on this relief. Employees cannot over-fund their plans. If they are due to retire on two-thirds of final salary they cannot use AVC contributions to provide more than this amount.

AVCs are a tax efficient way to improve pension income for employees where the benefits provided under a company scheme are not comprehensive - for example where the pension is based on basic salary rather than taxable earnings.

They are important where an employee joins a company at a relatively older age - if a person joins a company at age 40 they will only be in the pension scheme for 20 years (where retirement age is 60 years) compared with the more normal starting age of 20 years which generated 40 years service.

Where pension schemes offer a benefit of two-thirds of final salary, people need 40 years service to qualify for the full benefit (it is calculated as one 1/60 of salary for each year of service with 40 years making 40/60 or 2/3).

With only 20 years service the pension entitlement would be just one-third of final earnings, so to improve the pension position the employee should either make tax-free contributions through the AVC route or consider making other investments which would help to boost income in the future.