Pension savers keen to squeeze the most into their retirement savings have a few weeks left to take full advantage of all of the (increasingly rare) pension perks HMRC allows in the current tax year.
With income tax allowances frozen, and almost everyone paying more in tax as each year goes by, pension saving is one of the few ways to keep more of earned income and build wealth.
The current 2025/26 tax year ends on 5 April, resetting several allowances. Before then, savers and investors who can are wise to make the most of the available ways to shelter money from the taxman and boost their pension savings.
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Mike Ambery, retirement savings director at Standard Life said: “There’s still a lot you can do to make the most of your pension allowance. Pensions are one of the most powerful long-term savings tools, and making full use of them can help ensure you don’t pay more tax than necessary and keep more of your income working for you.”
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1. Work out (and use up) your pension annual allowance
An obvious one, but putting as much as you can into your pension each year is a big winner when it comes to boosting your eventual retirement income. The end of the current tax year is a good time to work out how much you have already paid in and how much more you could pay in – which can be tricky.
For most people, the maximum you can put into your pension each year and still get tax relief is the pension annual allowance. It is £60,000 or 100% or your relevant earnings, whichever is less. This includes contributions from you, your employer and third parties. Relevant earnings include all earned income but not pension income, dividends or most rental income.
But higher earners may have a tapered allowance, reducing to as little as £10,000 if adjusted income exceeds £260,000. While they may also be able to carry forward unused allowances from the previous three tax years, those caught up in these numbers should seek advice.
Emma Sterland, chief financial planning officer at wealth manager Evelyn Partners, explained: “If you think you’re subject to the taper but would like to maximise pension contributions for the tax year, then 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 the ‘right side’ of such thresholds.”
Also if you’ve already accessed your pension, it’s important to be aware that the Money Purchase Annual Allowance (MPAA) may apply instead of your pension annual allowance, reducing the amount you can contribute to a pension to £10,000 a year while still receiving tax benefits.
Ambery said: “This is triggered when someone begins taking taxable income from their pension, so it’s good to know which allowance applies to you.”
2. Pay up to £220k into your pension using ‘carry forward’
Savers who are set to maximise their current year’s pension allowance and have money on the sidelines they want to put to good use – maybe you got an inheritance this tax year – can take advantage of what’s known as ‘carry forward’ rules.
This is where you can go back and use up any unused annual pension allowances from the three previous tax years.
Sterland, at Evelyn Partners, explained: “The annual allowance is £60,000 for 2025/26 and was the same in the previous two years, but for 2022/23 it was £40,000. That affords a theoretical maximum contribution of £220,000 that can be paid into a pension in this tax year for those entitled to four years of the full annual allowance, and whose relevant earnings in this tax year allow it.”
The end of the tax year is the perfect time to review your use of carry forward. But there are some rules and restrictions to be aware of:
- You must have first used up the current year’s allowance – so the first step is to get an accurate reading of this year’s contributions and take those to the limit.
- You will need to have had a pension in each of the three previous tax years but you don’t need to have made any contributions and your new contributions do not have to be made into the same pension.
- Once the current year allowance is fully utilised, allowances from the ‘oldest year’ of the previous three are used up first and at the end of every tax year, the oldest year falls away. Therefore, any allowances not used from the oldest year – now 2021/22 – will be lost for good if they are not carried forward.
- To get tax relief on pension contributions that you make yourself, you need to ensure that the payments made in any tax year do not exceed relevant earnings in that year. An employer is not restricted by an individual’s earnings so they are able to pay in higher sums.
Sterland said: “Savers who have a large lump sum via a windfall like an inheritance might be looking to boost their pension by a maximum amount using up carry forward allowances before 5 April.
“But they need to be aware that that maximum will be limited by their relevant earnings in this tax year. Remembering that salary sacrifice pension contributions or other benefits taken by salary sacrifice will reduce relevant earnings, which could be an issue if someone wanted to make a big personal lump sum contribution using carry forward allowances.”
3. Make sure you are getting all the tax relief you should
The big draw to pensions are the tax savings – known as tax relief. Contributions are made from pre-tax income, so this effectively turns an £80 contribution into £100 for basic-rate taxpayers.
Higher and additional rate taxpayers can get further tax relief, making pension contributions even more attractive. They may need to claim it back via self-assessment. It means they could get a further £20 and £25 respectively on their tax returns, and this money can go into the pension too.
Ambery, at Standard Life, said: “However, some people don’t need to claim anything because their scheme gives full tax relief through payroll, for example, via salary sacrifice or a ‘net pay’ arrangement, where contributions are taken before income tax is applied.
“It’s a good idea to check with your employer or pension provider to understand exactly how tax relief works in your specific scheme.”
4. Did you get an end of year bonus? Sacrifice some into your pension
Bonus season typically happens – for those lucky enough to get one – between December and March. For those expecting a bonus, redirecting some or all of it into your pension can be a highly efficient way to strengthen your retirement savings.
Ambery said: “Bonus sacrifice can result in savings on income tax and National Insurance, making it a smart way to keep more of the value of your reward while giving your pension a meaningful boost. It’s a straightforward step that can help your money go further – just be sure to check that your total contributions remain within your annual allowance.”
Why you should consider acting now
Higher and additional rate pension tax relief had been, thankfully, the cat with nine lives when it came to chancellors seeking opportunities for raising extra revenue at recent Budgets.
“But the pressure on the UK’s public finances is not going away, so who knows what could happen to the higher rates of pension tax relief, or to the recently-expanded £60,000 annual allowance, in the next few years?” said Evelyn Partners’ Sterland.
“While the annual allowance for pension contributions is not quite "use-it-or-lose-it" in the same way – as previous years’ unused allowances might be available under "carry forward" rules – there’s no guarantee that either the higher annual allowance or carry forward will be around forever,” she added.
