Pensions - Articles - Could you turbo charge your pension before the tax year end

Pension tax relief remains a crucial benefit for the UK’s earners and savers, and the end of the tax year on 5 April forms a deadline for those looking to top up their retirement pots.

Emma Sterland, Chief Financial Planning Officer at Evelyn Partners, warns that we can’t be too relaxed about the opportunity to top up pensions with the bonus of relief at the highest rate of income tax:

'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.

‘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 current Chancellor was evidently intent on reducing the cost to the Treasury of this benefit as she announced a quite severe future limit on salary sacrifice schemes at the November Budget.

‘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?

'The end of the tax year signals the expiry of various allowances and exemptions like those for Individual Savings Accounts and capital gains tax. 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.

'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.’

Pension versus ISA or mortgage?
Emma says: ‘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, and for those in salary sacrifice schemes, where there is an extra boost from National Insurance relief.

‘But before ploughing more money into a pension, you should reflect on whether you can afford to lock away the funds until the minimum pension access age (soon to rise from 55 to 57), and whether the extra contributions put you in a better financial place. It could make sense to overpay on the mortgage, to bring the loan down into a lower LTV band, reduce monthly payments and free up the household budget.

‘If you will need access to the funds, in the next five to 10 years for instance, then putting the money into an ISA might be preferable. While money put into an ISA does not benefit from tax relief, it does grow and accumulate income free of tax and no tax is paid on the way out, so they play a crucial role in building wealth that can be used both before and after retirement. The best way to tackle all these calculations is through proper cash-flow modelling with a good financial planner.

‘There could be other reasons for limiting pension contributions: for instance, some savers are reluctant to build up their pension pot beyond the old Lifetime Allowance, as this is where the tax-free cash cap of £268,275 takes effect. Other high earners might be subject to the tapered annual allowance and can see their AA fall to as little as £10,000, so they will need to think carefully about their options.

'All other things being equal, using up some more annual allowance is likely to be a winner for those who have some slack in their monthly budget or a lump sum that they want to work hard for their future, and for those later in their careers who want to turbo-charge their pot before retirement.

'For many of the more than 20 million employees participating in workplace pensions, this could be simply a case of raising their percentage monthly contribution through HR or payroll. And for those in an advantageous salary sacrifice scheme extra contributions are even more beneficial because of the additional NI savings (often from the employer as well as the employee’s own NI). 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.

‘At the least, earners should ensure they are taking advantage of any employer offer to match contributions beyond auto-enrolment minimums. As we come towards the time of year when remuneration is finalised, those expecting a bonus should consider whether they can sacrifice at least some of it into their pension, as this way they get to keep it tax-free. But if they have already made monthly contributions through the year they need to make sure they don’t bust their AA or try and pay in more than they are earning in that tax year. 

‘You can use a lump sum from anywhere to boost pension savings, with the possibility of contributing more than the £60,000 AA if you have unused AA from the previous three years, and as long as you do not exceed relevant earnings in the tax year of the contribution [see below]. The end of the tax year on 5 April might feel like a way off, but savers should start thinking about all this now, not least in the case of bonuses because payroll or HR departments need to know in advance of bonus awards whether you elect to sacrifice it into your pension. This can cause difficulties for some workers, as without knowing the size of the bonus it can be a bit of a juggling act deciding how much of it to sacrifice if you are close to your annual allowance.

‘Such reckonings, especially for those who are looking to maximise a big one-off pension contribution using carry forward allowances, is a job best managed by a financial adviser or planner, to avoid making mistakes and getting into a protracted and difficult exchange with HMRC.’

The annual allowance
The AA puts a limit on how much can be saved into a pension each year with tax relief benefits. It means that in the current tax year the typical saver can put a maximum of £60,000 into a pension while still benefiting from pension tax relief. That amount is gross contributions, or the total put into a pension, so includes employer top-ups and the tax relief itself.

Emma warns, however: ‘The saver themselves cannot personally pay more into their pension in a tax year than they earn in that year, which is generally referred to as pensionable or relevant earnings". This includes all earned income but not pension income, dividends or most rental income – and if it is less than £60,000 then it sets the maximum a saver can personally make in tax-relieved pension contributions, although employer contributions can be made on top (up to the AA).

‘Salary sacrifice pension contributions or other benefits taken by SS will reduce relevant earnings, which could be an issue if someone wanted to make a big personal lump sum contribution, by for instance using carry forward allowances [see below].’

It is possible to contribute more than the AA into a pension annually, but the excess contributions will suffer a charge usually equal to the amount of tax relief awarded. If the AA is exceeded, inadvertently or otherwise, and the saver receives tax relief on their excess contributions – which is entirely possible - then they could be faced with a future tax bill from HMRC to claw back the tax relief.

The tapered annual allowance
Emma says: ‘The highest earners – those with a threshold income over £200,000 - can face a big disadvantage in pension saving because the amount of tax relief they can claim is usually limited by a gradual tapering of their annual allowance.’

The tapered annual allowance will affect anyone with a ‘threshold income’ above £200,000 and kicks in when ‘adjusted income’ rises above £260,000 (which includes income from all sources, as well as any employer pension contributions). The high earner will see their AA reduce by £1 for every £2 they exceed £260,000, until those earning £360,000 and above will be subject to the minimum tapered AA of £10,000.

Emma adds: ‘Even though the minimum amount that a high earner can contribute to pensions under the tapered annual allowance was raised to £10,000 from April 2023 (from £4,000), this still means they are very restricted in the amount of tax-relieved contributions they can make into a pension – at just a sixth of the amount of those not subject to the taper.

'Those caught up in these numbers should seek advice. 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.’

Carry forward allowances and lump sum contributions

Those who are set to maximise their current year’s allowance and have money on the sidelines they want to put into their pension can also make use of any unused annual allowances from the three previous tax years thanks to carry-forward rules.

Emma says: 'Note that 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 AA, and whose relevant earnings in this tax year allow it (and subject to having had a personal pension in place already for those years).’

There are some rules and restrictions to note when considering carrying 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.  

 

Emma adds: ‘So 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 reduces relevant earnings.’

Business owners and the self-employed
Business owners with irregular earnings who receive a glut of revenue all at once often find carry forward a very useful pension-boosting tool.

Emma says: 'Due to annual allowance rules business owners who have control over payments and remuneration can also opt for the business to make employer contributions into their pensions to maximise carry forward even if their relevant earnings in that year are much lower. But they need to be careful of tapering rules because while threshold income does not include employer contribution, adjusted income does.

'The ability to carry forward can be extremely useful for those looking to catch up on pension contributions because they want to give their pot a late boost before retirement, or because their financial position has improved and they want to take advantage of the tax reliefs on offer.

'It can also be useful for those restricted by the tapered AA, especially if their earnings have suddenly increased and in previous years were below the threshold for the tapered allowance. In all these instances though, it’s strongly recommended that savers take financial advice.’

Claiming back higher and additional rate tax relief
Emma says: 'Savers who want to use up their annual allowance(s) and pay a lump sum into their pension often do so into a personal pension like a SIPP, even if they also have an active workplace scheme.  Personal pension providers will add basic rate tax relief automatically, but it is up to the saver to claim back higher or additional rate tax relief.

‘Evidence suggests that a huge amount of pension tax relief is going unclaimed. In the case of self-administered personal pensions, this very expensive oversight could be a case of forgetfulness as much as ignorance. 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.

‘So savers must remember to include this on their self-assessment tax return, or if they do not otherwise need to register for SA then it is possible to contact HMRC directly.’