Pension savers currently have a window to review and optimize their retirement fund contributions as the tax year draws to a close; we examine how
There are just a few weeks left for pension savers who want to maximize their retirement savings to benefit from all of the (increasingly rare) pension perks that HMRC permits during the current tax year.
One of the few ways to preserve more of earned income and accumulate wealth is through pension saving, as income tax allowances have been frozen and nearly everyone's tax burden has increased annually.
Several allowances will be reset on April 5th, the end of the current 2025 - 2026 tax year. Before then, it would be prudent for investors and savers to take advantage of all the options available to them in order to increase their pension savings and hide money from the tax man.
Mike Ambery, Standard Life's director of retirement savings, stated: "There are still numerous ways to maximize your pension benefit. Making the most of pensions, which are among the most effective long-term savings options, can help you avoid paying more taxes than you need to and keep a larger portion of your income working for you. The "
1. Calculate (and spend) your yearly pension allowance
It should go without saying that increasing your annual pension contribution is a great way to increase your ultimate retirement income. Finding out how much you have already paid and how much more you could paywhich can be challengingis a good idea at the end of the current tax year.
For the majority of people, the pension annual allowance is the maximum amount they can contribute to their pension each year while still receiving tax relief. Either 60,000 or 100% of your relevant earnings, whichever is lower, is what it is. Contributions from you, your employer, and outside parties are included in this. All earned income is considered relevant, with the exception of dividends, pension income, and the majority of rental income.
Higher earners, however, might receive a tapered allowance, which could drop to as little as 10,000 if their adjusted income surpasses £260,000. Those caught up in these figures should get advice, even though they might be able to carry over unused allowances from the preceding three tax years.
"If you believe you are subject to the taper but would like to maximize pension contributions for the tax year, you really should speak to a financial planner because the calculations for adjusted and threshold incomes can be very involved as can the possible steps to remain on the right side of such thresholds," explained Emma Sterland, chief financial planning officer at wealth management firm Evelyn Partners.
Additionally, if you have already taken advantage of your pension, you should be aware that the Money Purchase Annual Allowance (MPAA) may be applicable in lieu of your pension annual allowance. This would limit your annual pension contribution to £10,000 while still allowing you to receive tax benefits.
"This is triggered when someone starts taking taxable income from their pension, so it's good to know which allowance applies to you," Ambery stated.
2. Use carryover to fund your pension up to £220,000
The so-called carry forward rules are available to savers who want to maximize their current year's pension allowance and have money on the side that they would like to use wisely. You may also be eligible to use an inheritance this tax year.
You can use up any unused annual pension allowances from the three prior tax years at this point.
"The annual allowance is 60,000 for 2025/26 and was the same in the previous two years, but it was 40,000 for 2022/23," Sterland of Evelyn Partners clarified. This allows individuals who are eligible for four years of the full annual allowance and whose relevant earnings in this tax year permit it to make a theoretical maximum contribution of £220,000 into a pension during this tax year.
Reviewing your use of carryover is best done at the end of the tax year. There are a few guidelines and limitations to be mindful of, though.
Accurately calculating this year's contributions and taking them to the limit is the first step, since you must have already used up the current year's allowance. Although you must have had a pension in each of the three prior tax years, you are not required to have contributed to it, nor are your new contributions required to go toward the same pension. The allowances from the oldest of the preceding three years are used up first after the current year allowance is completely utilized, and the oldest year disappears at the end of each tax year. As a result, any unused allowances from the oldest year20212022will be permanently lost if they are not carried over. In order to receive tax relief on your own pension contributions, you must make sure that the payments you make during any given tax year don't exceed your relevant earnings for that year. Because an employer is not constrained by a worker's income, they can make larger payments. According to Sterland, "Savers who have a sizable lump sum from an inheritance or other windfall may want to increase their pension by as much as possible by using up carry forward allowances before April 5th."
"However, they must understand that their relevant earnings for this tax year will limit that maximum. If someone wanted to use carry forward allowances to make a large personal lump sum contribution, it could be problematic because salary sacrifice pension contributions or other benefits will lower relevant earnings.
3. Verify that you are receiving all of the tax benefits that you are entitled to
The tax benefits, also referred to as tax relief, are the main attraction of pensions. Because pre-tax income is used to make contributions, basic-rate taxpayers' 80 contribution is essentially increased to 100.
Pension contributions become even more alluring for taxpayers with higher and additional rates because they can receive additional tax relief. They might have to use self-assessment to reclaim it. As a result, they may receive an additional 20 and 25 on their tax returns, respectively, which they may also use to fund their pension.
However, some people don't need to make any claims because their plan provides complete tax relief through payroll, such as through salary sacrifice or a net pay arrangement, where contributions are made before income tax is applied, according to Ambery of Standard Life.
It's a good idea to find out exactly how tax relief operates in your particular plan by contacting your employer or pension provider.
4. Put some of your end-of-year bonus into your pension if you received one
For those who are fortunate enough to receive one, bonus season usually occurs between December and March. Transferring a portion or all of your bonus into your pension can be a very effective strategy for people who are expecting one to increase their retirement funds.
According to Ambery: "Bonus sacrifice is a wise method to retain more of the value of your reward while significantly increasing your pension because it can lead to savings on income tax and national insurance. Just make sure that your total contributions stay within your annual allowance. This simple step can help your money go farther.
Why you should think about taking action right now.
Fortunately, when it came to chancellors looking for ways to increase revenue in recent budgets, higher and additional rate pension tax relief had been the cat with nine lives.
Evelyn Partners Sterland claimed, "But the strain on the UK's public finances is not going away, so who knows what could happen to the recently expanded 60,000 annual allowance, or to the higher rates of pension tax relief, in the next few years".
She went on to say, "There is no guarantee that either the higher annual allowance or carry forward will be around forever, even though the annual allowance for pension contributions is not quite "use-it-or-lose-it" in the same way that previous years' unused allowances might be available under "carry forward" rules.
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