Pensions and tax relief: Making the most of your allowances

For high income earners and affluent professionals, pensions are far more than just a retirement savings tool. They are one of the most effective, flexible, and tax-efficient vehicles available for long-term wealth planning. By making the most of your pensions and tax relief allowances, individuals can simultaneously reduce their current income tax liabilities, grow capital free of income and capital gains tax, and build a resilient income stream for later life.

Whether you're a business owner, senior executive, or professional approaching retirement, understanding how to strategically use pension tax reliefs could make a substantial difference to your personal wealth.

What tax relief is available?

Pension contributions in the UK benefit from a range of tax reliefs that reward long-term saving and responsible planning. These reliefs are particularly valuable for higher-rate and additional-rate taxpayers, as the effective tax savings can be significant.

1. Annual Allowance

For the 2025/26 tax year, the standard annual allowance remains at £60,000. This is the maximum amount you can contribute across all your pension schemes in a tax year and still receive tax relief.

• Tax relief is given at your marginal rate: That means a 40% taxpayer can save £40,000 in a pension for a net cost of just £24,000. An additional-rate taxpayer (45%) could save even more.

• Employer contributions count: If your employer makes contributions, these count towards your allowance, but they are still highly tax-efficient and do not attract National Insurance.

2. Carry Forward Unused Allowances

If you haven’t used your full annual allowance in the last three tax years, the carry forward rules allow you to make a larger one-off contribution by using unused allowances.

• This means you could potentially contribute up to £180,000 (3 x £60,000) from the previous years, plus this year’s allowance, for a total contribution of £240,000, assuming your earnings allow this.

• It’s a particularly useful tool for individuals receiving a large bonus, selling a business, or receiving windfall lump sum.

3. Tapered Annual Allowance

If your adjusted income exceeds £260,000, your annual allowance will gradually reduce down to a minimum of £10,000. However, this doesn’t necessarily mean you should stop contributing:

• Salary sacrifice arrangements, where you reduce taxable income in exchange for employer pension contributions, can help preserve some of your annual allowance.

• Employer contributions remain a valuable planning tool, even if you’re personally restricted by tapering.

Effective use of these rules can require careful coordination between your income, bonus structures, and broader tax planning, but the rewards are often well worth it.

Why Pensions Are So Powerful

Beyond immediate tax relief, pensions also offer additional long-term benefits that make them a cornerstone of holistic wealth planning.

Tax-Free Investment Growth

Funds within your pension grow free from income tax and capital gains tax, allowing compound growth to work to its full potential. Over 10 or 20 years, this tax-free compounding can create substantial added value when compared with taxable investment accounts.

Tax-Efficient Retirement Income

When it comes time to draw your pension, you can typically access 25% of your pot tax-free, with the remainder taxed at your marginal income tax rate at the time of withdrawal.

This is particularly valuable if:

• You expect your income needs to fall in retirement

• You plan to structure withdrawals in line with personal allowance thresholds

• You wish to supplement other tax-free income (e.g. from ISAs)

Flexi-access drawdown arrangements give you control over how and when to take income. Ideal for phased retirement or managing your tax position year-to-year.

Strategic Pension Planning in Practice

High earners often juggle multiple priorities: growing their businesses, supporting families, repaying debt, and investing in other ventures. But this complexity makes it even more important to align pension planning with wider goals.

Here’s what a strategic approach might involve:

• Coordinating pension contributions with cash flow to avoid overcommitting

• Timing contributions to coincide with bonus payments or business exits

• Maximising carry forward opportunities while they’re still available

• Balancing pension savings with other tax shelters like ISAs, VCTs, or onshore and offshore bonds

• Aligning pension drawdown with your wider retirement strategy, considering when to access taxable and non-taxable income sources

Even simple steps, such as reviewing your pension provider's investment options or ensuring your nominations are up to date, can have a big impact on performance and outcomes.

Common Pitfalls to Avoid

While pensions offer excellent tax efficiency, it’s important to watch out for:

• Exceeding your annual allowance, which can trigger a tax charge

• Failing to use carry forward in time, it can only go back three years

• Neglecting to review pension arrangements regularly, especially when changing jobs or nearing retirement

• Overlooking the lifetime allowance changes, although abolished in 2024, still require careful attention to drawdown rules and planning

Working with a professional financial adviser ensures your pension strategy remains compliant, current, and fully aligned with your evolving financial picture.

Ready to maximise your pensions and tax relief?

With the right strategy, pensions can help you save tax, grow your wealth, and build a flexible retirement plan that supports your ambitions.

Let’s design a pension strategy tailored to your income, goals, and long-term vision. Contact us today to review your pensions and explore your next move with confidence.