Category: Pension

Still time to top up your pension contributions

With the end of the 2025–26 tax year approaching on 5 April 2026, there is still time for taxpayers to increase their pension savings and benefit from valuable tax relief. Pension contributions remain one of the most tax-efficient ways to save for retirement, with relief available at a taxpayer’s highest marginal rate.

Tax relief on private pension contributions is generally available on contributions of up to 100% of relevant earnings, subject to certain limits. The relief effectively reduces the cost of saving into a pension. Basic rate taxpayers benefit from 20% tax relief, while higher rate taxpayers can claim 40% relief and additional rate taxpayers can receive 45% relief on their contributions.

For basic rate taxpayers, the initial 20% relief is usually applied automatically by the pension provider. Higher and additional rate taxpayers can claim the extra relief through their self-assessment or by contacting HMRC if they do not normally file a return.

Most individuals can contribute up to the annual allowance of £60,000 each tax year while still benefiting from tax relief. Contributions above this limit can trigger an annual allowance charge. However, it may be possible to contribute more by using the carry forward rules, which allow unused pension allowances from the previous three tax years to be used, provided they made pension contributions during those years.

Why inflation matters when funding pension funds

When planning pension funding, inflation is often acknowledged but not always fully reflected in contribution decisions. Using an average inflation rate of around 5% over recent years helps to illustrate why this matters so much. Even when inflation appears to be easing in the short term, its long-term effect on retirement income can be significant.

Inflation erodes purchasing power. A pension pot that looks comfortable today may buy far less in real terms by the time retirement arrives. At an average inflation rate of 5%, prices double roughly every fourteen years. This means that someone planning to retire in twenty years’ time will need close to twice the income they might intuitively expect, just to maintain the same standard of living. Ignoring inflation risks building a pension fund that appears adequate on paper but falls short in practice.

Inflation also affects investment returns. Pension growth is often discussed in nominal terms, but what really matters is real growth, that is growth after inflation. A fund growing at 6% per year sounds healthy, but if inflation is averaging 5%, the real increase in value is modest. This has implications for asset allocation, contribution levels and the balance between growth and lower risk investments as retirement approaches.

For those making regular contributions, inflation should influence both the starting level and how contributions increase over time. Flat contributions that are not reviewed regularly lose real value year by year. Linking contribution increases to inflation or at least reviewing them periodically in light of inflation trends, can make a material difference to the eventual outcome.

Finally, inflation uncertainty reinforces the importance of flexibility. Retirement may last twenty or thirty years, during which inflation will vary. Building in a margin of safety, through higher contributions or diversified investments, can help protect against prolonged periods of higher inflation.

Taking inflation seriously is not about pessimism. It is about realism. Factoring an average inflation rate of 5% into pension planning leads to better informed decisions and a greater chance that retirement income will meet expectations when it is most needed.

Workplace pensions

Automatic enrolment for workplace pensions has helped many employees to start making provision for their retirement with employers and government also contributing to make a larger pension pot.

The law states that employers must automatically enrol workers into a workplace pension if they are aged between 22 and State Pension Age, earns more than minimum earning threshold. The minimum threshold is currently £10,000 and will remain the same in 2026-27. The employee must also work in the UK and not already be a member of a qualifying work pension scheme. Employees can opt-out of joining the pension scheme if they wish.

Under the rules, employers are also required to offer their workers access to a workplace pension when a change in their age or earnings makes them eligible. This must be done within 6 weeks of the day they meet the criteria.

Under the automatic enrolment rules the employer and the government also add money into the pension scheme. There are minimum contributions that must be made by employers and employees.

Both the employer and employee need to contribute. There is a minimum employer contribution of 3% and employee contribution of 4%. This means that contributions in total will be a minimum of 8%: 3% from the employer, 4% from the employee and an additional 1% tax relief. For example, if you pay £40, your employer adds £30, and you receive £10 in tax relief, a total of £80 goes into your pension.

In most automatic enrolment schemes, employees make contributions based on their total earnings between £6,240 (the lower qualifying earnings limit) and £50,270 (the upper qualifying earnings limit) a year before tax. This means that for many employees the 8% contribution rate will not be based on their full salary.

Inheriting Additional State Pension

The Additional State Pension is only available to those who reached the state pension age before 6 April 2016 and are receiving the Old State Pension. The Additional State Pension is an extra amount of money paid on top of the basic Old State Pension.

The Old State Pension is designed to provide individuals of state pension age with a basic regular income and is based on National Insurance Contributions (NICs). To get the full basic State Pension, most people need to have had 35 qualifying years of NICs.

Claimants will automatically have received the Additional State Pension if they were eligible for it. Those who had contracted out were not eligible for the Additional State Pension.

If your spouse or civil partner dies, you may be able to inherit some of their Additional State Pension if you reached State Pension age before 6 April 2016. If you do not receive the full basic State Pension, you may be able to increase it by using your spouse or civil partner’s qualifying National Insurance years.

You may also be able to inherit part of their Additional State Pension or Graduated Retirement Benefit. Different rules apply if you reached State Pension age on or after 6 April 2016. If relevant, you should contact the Pension Service to check what you can claim.

Autumn Budget 2025 – Pension changes

The Chancellor has kept the main pension allowances unchanged but has confirmed a new cap on salary sacrifice arrangements that will apply from April 2029.

There had been heated speculation that the Chancellor would change the pension rules to help the government raise taxes, but no changes were announced to the annual allowance (which remains at £60,000) or to the carry-forward rules which can use up previous year’s annual allowances. The lump sum allowance has also remained unchanged at £268,275.

However, the Chancellor announced changes to the salary sacrifice arrangements for pension contributions. Salary sacrifice allows employees to reduce part of their salary or bonus in exchange for pension contributions, which is tax-efficient and helps save for retirement. However, this arrangement has disproportionately benefited higher earners with salary sacrifice costs expected to rise from £2.8 billion in 2016-17 to £8 billion by 2030-31.

From April 2029, the government plans to introduce a cap on salary sacrifice contributions which will limit the amount that can be sacrificed without incurring National Insurance Contributions (NICs) to £2,000 per employee. Salary sacrifice contributions above this amount will be subject to employer and employee NICs. Pension contributions that are not part of a salary sacrifice will remain unchanged.

The Chancellor reaffirmed the government's commitment to maintaining the Triple Lock on the State Pension throughout this parliament. This means that in April 2026, the State Pension will increase by 4.8%. The Triple Lock ensures that the State Pension rises by the highest of three measures: inflation, wage growth, or 2.5%, helping to protect pensioners' income against rising costs of living.

Also, starting from 6 April 2027, the government will close a loophole that allows individuals to use pensions for inheritance tax (IHT) planning. Under the new rules, any unspent pension pots will be brought within the scope of IHT.

Check your State Pension forecast

Your State Pension forecast shows how much you could receive, when you can claim it, and how to boost it by filling National Insurance gaps.

The Check Your State Pension forecast service provides a way to understand your State Pension entitlement. This is a joint service organised by HMRC and the Department for Work and Pensions (DWP) and is available to most individuals under State Pension age.

The forecast allows users to see:

• The amount of State Pension they could receive.
• The age at which they can start receiving it.
• Options for increasing their State Pension, such as by paying voluntary National Insurance contributions to cover any gaps.

The service also helps identify any shortfalls in National Insurance Contributions (NICs), enabling users to take action now to enhance future pension benefits.

To access the service, go to www.gov.uk/check-state-pension and sign in securely using your Government Gateway credentials. If you don’t have an account, you can easily create one. You may need to verify your identity using a photo ID, such as a passport or driving licence.

For added convenience, you can also check your pension forecast via the HMRC app, providing secure access on the go.

If you are already receiving or have deferred your State Pension, you’ll need to reach out to The Pension Service (UK) or the International Pension Centre (abroad). Regularly checking your State Pension status is important to help maximise your entitlement and to help assess any additional savings or pensions you may need for a comfortable retirement.

Tax relief for employer contributions to a pension scheme

Employers can generally claim tax relief on contributions made to a registered pension scheme by deducting those payments as an expense when calculating their business profits. This reduces the amount of taxable profit and therefore lowers the overall tax bill.

For businesses involved in a trade or profession, employer pension contributions can usually be claimed as a business expense on the proviso that the payments are incurred wholly and exclusively for the purpose of running the business.

If the employer is a company with investment business, the employer contributions should be deductible as an expense of management.

When claiming tax relief on employer pension contributions, there are a few important rules to keep in mind. Importantly, only contributions that have actually been paid qualify for relief. Other amounts recorded as liabilities that have not yet been paid are not eligible for relief until they are paid. This means employers can only claim relief in the accounting period during which the payment is actually made.

The pension tax legislation amends the normal rules regarding what is an allowable deduction and the timing of a deduction.

International employers contributing to a UK-registered pension scheme benefit from the same rules. In addition, the same basis of relief is also given to employer contributions that are referred to as relevant migrant member contributions.

What if your pension contributions are excessive?

You can claim tax relief on pension contributions up to 100% of earnings, but exceeding the annual allowance may trigger charges. Tax relief is paid on pension contributions at the highest rate of income tax paid.

The first 20% of tax relief is usually automatically applied by your employer with no further action required if you are a basic-rate taxpayer. If you are a higher rate or additional rate taxpayer, you can claim back any further reliefs on your self-assessment tax return.

There is an annual allowance for tax relief on pensions of £60,000. There is also a three year carry forward rule that allows you to carry forward any unused amount of your annual allowance from the last three tax years if you have made pension savings in those years.

If your total pension contributions are excessive and you exceed the annual allowance, you may face a tax charge. Your pension provider should inform you if you exceed the limit within their scheme, but if you have multiple pensions, you will need to request statements from each provider to check your position. You or your pension provider must pay any tax due from exceeding the limit.

You must report the charge in the ‘Pension savings tax charges’ section of your self-assessment tax return or use form SA101 if filing by paper. This is required even if your pension provider paid all or part of the tax due. You can still claim tax relief on contributions. HMRC does not tax anyone for going over their annual allowance in a tax year if they retired and took all their pension pots because of serious ill health or they died.

What is the pension’s Money Purchase Annual Allowance?

The Money Purchase Annual Allowance (MPAA) is a pension rule designed to prevent individuals from gaining double tax relief on pension contributions. It targets situations where someone withdraws money from their defined contribution pension pot and then reinvests it, effectively receiving tax relief on the same funds twice.

The normal annual pension contribution limit is currently £60,000. However, once the MPAA is triggered the pension contribution limit is significantly reduced to the MPAA cap of £10,000 per year.

The MPAA is triggered when you start accessing your pension flexibly, such as by:

• Withdrawing your entire pot as a lump sum (in full or in part).
• Moving into flexi-access drawdown and taking income.
• Buying a flexible annuity.
• Exceeding withdrawal limits under a capped drawdown plan.

It does not usually apply if you:

• Only withdraw up to a 25% tax-free lump sum allowance.
• Buy a lifetime annuity.
• Cash in a small pension pot of less than £10,000.

If applicable, the reduced pension allowance can affect future retirement planning and needs to be considered before making any pension withdrawals.

Pension contributions, net pay or relief at source?

Your pension scheme type affects your tax relief. Workplace pensions offer tax benefits, but the method used, net pay or relief at source, changes how and when you get them. Your employer or pension provider should confirm which arrangement your scheme uses, and this will affect both your payslip and potential tax relief.

Net pay arrangement

In a net pay arrangement, your pension contribution is taken before tax is calculated. This reduces your taxable income, meaning you automatically receive full tax relief at your highest income tax rate. This can be the basic, higher or additional tax rates. The amount shown on your payslip includes both your contribution and the tax relief applied.

However, if you do not pay tax, for example because you earn below the personal allowance, you will not receive any tax relief under this method.

Relief at source

With the relief at source method, your pension contributions are taken after tax, and National Insurance is deducted from your pay. Your pension provider then adds 20% basic rate tax relief directly into your pension pot. This means your payslip will show only your contributions and not the tax relief.

If you are a higher or additional rate taxpayer (or pay the higher or top rate in Scotland), you can claim extra tax relief through your self-assessment return or by contacting HMRC.