Pension reliefs – Making the most of the current tax rules

Pensions remain one of the most tax-efficient ways to save and invest in the UK, even with upcoming proposals to limit the Inheritance Tax benefits of passing on a pension within your estate.  

Yet despite successive governments retaining and, in some cases, enhancing pension tax relief, many individuals still do not make full use of what is available to them.  

With the rules in their current form, now is an excellent time to revisit your pension planning. 

How pension tax relief works 

Every personal contribution you make to a registered pension scheme is usually paid net of the basic-rate tax, with the Government adding 20 per cent tax relief directly into the pension. 

So, if you contribute £800, the Government adds £200, making a total pension contribution of £1,000. 

For higher-rate taxpayers, the effective boost is even greater, as a £1,000 gross contribution costs just £600 net after claiming higher-rate relief through Self Assessment.  

Additional-rate taxpayers paying 45 % can receive relief at that rate, reducing the effective cost to £550 per £1,000 contributed. 

It is worth noting that higher and additional-rate relief is not applied automatically and it must be claimed through a Self Assessment tax return or by contacting HMRC directly to adjust your tax code. A surprisingly large number of higher-rate taxpayers leave this unclaimed each year. 

The annual allowance 

For 2025/26 and 2026/27, the standard annual allowance remains £60,000. This is the total amount of contributions, from you and your employer combined, that can benefit from tax relief in a given tax year.  

For high earners, a tapered annual allowance applies once adjusted income exceeds £260,000, the allowance reduces by £1 for every £2 of income over that threshold, down to a minimum of £10,000. 

If you have already flexibly accessed a defined contribution pension, your future contributions to money purchase pensions are subject to the Money Purchase Annual Allowance (MPAA) of £10,000, rather than the full £60,000. This is an important consideration for anyone approaching or in early retirement. 

Carry forward – a powerful planning tool 

One of the most underused features of the pension system is carry forward. Provided you were a member of a registered pension scheme in each of the previous three tax years, you can bring forward any unused annual allowance from those years and add it to the current year’s limit. 

In practice, this means that if you have not made full use of your allowance in recent years – perhaps because your income has fluctuated, you were on a career break, or you simply did not know about the rule, you may be able to make a significantly larger contribution now and receive full tax relief on it. 

The maximum a standard-rate taxpayer could theoretically contribute to their pension in a single year is £240,000 gross. 

The personal allowance trap 

For those earning between £100,000 and £125,140, pension contributions are particularly valuable because they reduce your adjusted net income.  

This can restore the personal allowance, which is withdrawn at a rate of £1 for every £2 of income above £100,000.  

The effective rate of tax relief in this band can therefore be as high as 60 %. This makes pension contributions one of the most powerful financial planning tools available at this income level. 

If you or your partner earn over £60,000, the High‑Income Child Benefit Charge applies, with 1% of the benefit repaid for every £200 of income above that threshold.  

This means that once individual adjusted net income exceeds £80,000, entitlement to child benefit is lost entirely. 

Pension contributions can, therefore, play an important role in reducing adjusted net income and helping to preserve all or part of the High‑Income Child Benefit Charge, which is only available in full where individual income does not exceed £60,000. 

IHT changes from 2027 

It is also important to plan with one eye on the future. From April 2027, unspent pension funds will be brought within the scope of Inheritance Tax (IHT) for the first time.  

This represents a significant shift in the pension landscape and may prompt some individuals to reconsider how they structure their withdrawals and wider estate plan.

Acting now, while the current rules still apply, could be advantageous, especially as it may allow you to use gifting or trusts to distribute your estate more tax efficiently before your death.  

How can we help

To understand how pension reliefs could work for your individual circumstances or to review whether you have unused carry forward allowance available, please speak to your usual LF or LFWM contact.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits. 

The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning. 

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