Millions of workers are being urged to act before April 5 if they want to squeeze the maximum benefit from generous pension tax breaks.
With the end of the tax year looming, wealth manager Evelyn Partners says savers should consider whether they can afford to “turbo-charge” their retirement pots while relief at their highest marginal rate of income tax remains available.
Emma Sterland, Chief Financial Planning Officer at Evelyn Partners, said: “Taking advantage of pension tax relief is now perhaps more important than ever.
“Fiscal drag is increasing the tax burden on income and pushing many earners into higher tax brackets, which in turn also means savings and capital gains will be more exposed to tax, unless protected. 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?”
She said: “With personal 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 efficiently build wealth.”
£60,000 annual allowance – and how it works
The annual allowance (AA) limits how much can be paid into pensions each tax year while still benefiting from tax relief. For 2025/26, the standard annual allowance is £60,000 – covering total contributions, including employer payments and tax relief.
Tax year annual allowance
- 2022/23 £40,000
- 2023/24 £60,000
- 2024/25 £60,000
- 2025/26 £60,000
However, there is an important restriction: Brits cannot personally contribute more than their relevant earnings in that tax year.
Relevant earnings include salary, bonus, overtime and self-employed income – but not pension income, dividends or most rental income. Exceed the allowance and you face an annual allowance charge, typically equal to the tax relief received on the excess.
Salary sacrifice – use it before 2029?
For workers in salary sacrifice schemes, pension contributions can be even more attractive because of National Insurance (NI) savings. But there is a looming change: salary sacrifice arrangements for pensions will be capped at £2,000 from April 2029.
Ms Sterland said: “Salary sacrifice will be capped at £2,000 from April 2029 so the incentive is there for those with access to these schemes to take advantage now.”
She added that for many of the more than 20 million employees in workplace pensions, boosting retirement savings may be as simple as increasing their monthly percentage contribution through payroll.
Those expecting a bonus should also consider sacrificing some of it into their pension – but must ensure they do not exceed their annual allowance. The annual allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000 for those earning £360,000 or more.
Adjusted income annual allowance
- £260,000 – £60,000
- £300,000 – £40,000
- £340,000 – £20,000
- £360,000+ – £10,000
Carry forward: potential £220,000 opportunity
Savers can also use unused allowances from the previous three tax years under “carry forward” rules.
Because the annual allowance was £40,000 in 2022/23 and £60,000 in each of the following three years, someone eligible for the full allowance in all four years could theoretically contribute:
- £60,000 (2025/26)
- £60,000 (2024/25)
- £60,000 (2023/24)
- £40,000 (2022/23)
Total potential contribution: £220,000
But there are conditions:
- You must use the current year’s allowance first
- You must have had a pension open in those earlier years
- Personal contributions cannot exceed relevant earnings in the current tax year
Employer contributions are not restricted by earnings but do count towards the annual allowance.
Pension, ISA or mortgage?
Pensions offer tax relief at your marginal rate, tax-free investment growth and typically 25% tax-free cash (subject to a cap of £268,275 under the old Lifetime Allowance framework). However, pensions are locked away until the minimum pension access age, which is due to rise from 55 to 57.
Ms Sterland said: “Tax relief at your marginal rate and tax-free growth and income combine to make pension savings incredibly attractive, especially for higher and additional rate taxpayers.”
But she cautions that some may prefer:
- Overpaying their mortgage to reduce loan-to-value
- Using an ISA for flexibility if funds are needed within five to 10 years
ISAs offer tax-free growth and withdrawals, but no upfront tax relief.
Don’t forget to claim higher-rate relief
Basic-rate tax relief is automatically added to personal pensions such as SIPPs. But higher- and additional-rate taxpayers must claim the extra relief themselves via self-assessment or by contacting HMRC.
Ms Sterland warned: “Forgetting to claim back higher rates of tax relief will defeat half the rationale of injecting a lump sum into one’s pension in the first place.”
With the April 5 deadline fast approaching, advisers say those considering a large contribution – particularly using carry forward – should act soon, as payroll and HR departments often need advance notice for bonus sacrifice arrangements.