Personal Pensions and Year-End Tax Planning 2025/26: Maximising Relief Before 5 April

Pension contributions remain one of the most powerful tax planning tools available.

The combination of:

• Tax relief at your marginal rate
• Tax-free growth within the pension fund
• The ability to take a tax-free lump sum on retirement

makes pensions one of the most efficient long-term savings vehicles in the UK tax system.

With the tax year-end approaching, now is the ideal time to review your pension contributions — particularly if your income is high or fluctuating.

The Annual Allowance (AA) – £60,000 Standard Limit

For 2025/26, the standard Annual Allowance (AA) is £60,000.

This is the maximum amount that can be contributed to pension schemes each tax year with full tax relief (subject to earnings limits).

Tax relief is given at your marginal rate of income tax, meaning:

• 20% for basic rate taxpayers
• 40% for higher rate taxpayers
• 45% for additional rate taxpayers

For those earning between £100,000 and £125,140, pension contributions can be especially attractive because they help restore the Personal Allowance — creating effective tax relief of up to 60%.

Tapered Annual Allowance for High Earners

For individuals with adjusted income exceeding £260,000, the Annual Allowance is tapered.

The allowance is reduced by:

• £1 for every £2 of income above £260,000

It reduces to a minimum of:

• £10,000 for those with adjusted income above £360,000

This means very high earners may only receive relief on £10,000 of contributions in 2025/26.

It is essential to calculate adjusted income correctly, as the rules are complex and include employer contributions.

No tax relief is available on contributions exceeding your available Annual Allowance (unless covered by carry forward).

Carry Forward – Don’t Lose Unused Relief

One of the most valuable pension planning tools is the ability to carry forward unused Annual Allowance for three previous tax years.

For 2025/26, you can potentially use unused allowance from:

• 2022/23
• 2023/24
• 2024/25

However, timing is critical.

Any unused allowance from 2022/23 will expire on 5 April 2026.

Important reminder:

• In 2022/23, the Annual Allowance was £40,000, not £60,000.
• Tapering began at adjusted income of £240,000, not £260,000.

If you had unused allowance from that year, this is your last opportunity to use it.

Carry forward is only available if:

• You were a member of a registered pension scheme in the earlier year.
• You have sufficient pensionable income (“net relevant earnings”) to support the contribution.

The Abolition of the Lifetime Allowance (LTA)

The Lifetime Allowance (LTA), which previously limited the total amount of tax-advantaged pension savings, has been abolished.

Previously, exceeding the LTA could trigger punitive tax charges.

The abolition of the LTA charge has significantly changed pension planning for those with large pension pots.

However, the tax-free lump sum allowance remains capped.

Tax-Free Lump Sum Allowance

The tax-free lump sum allowance is now £268,275, which represents:

25% × £1,073,100 (the previous standard LTA level)

This remains the maximum tax-free amount available unless you hold a higher protection from previous LTA reductions.

For individuals with large pension funds, the removal of the LTA charge may influence:

• The timing of retirement
• The level of ongoing contributions
• Decisions about drawing benefits

Professional advice is particularly important in these cases.

Accessing Pension Funds

Currently, individuals aged 55 or over (rising to 57 from 6 April 2028) can access pension funds flexibly.

There is:

• No limit on the amount that can be withdrawn
• No restriction on the number of withdrawals

However:

• Only 25% (subject to the lump sum allowance) can generally be taken tax-free.
• The remainder is taxed as income at your marginal rate.

Drawing pension income can:

• Push you into higher tax brackets
• Trigger the Personal Allowance taper
• Affect Child Benefit eligibility
• Impact entitlement to certain benefits

Careful planning is essential before accessing funds.

Pension Contributions and the 60% Tax Trap

Income between £100,000 and £125,140 suffers an effective 60% marginal rate due to the tapering of the Personal Allowance.

Pension contributions reduce adjusted net income and can:

• Restore lost Personal Allowance
• Generate effective relief of up to 60%
• Reduce exposure to higher tax rates

This makes pension funding particularly tax-efficient in this income band.

Note: Relief works differently in Scotland and where dividend income is involved.

Contributions for a Spouse or Child

Even individuals with no earnings can benefit from pension contributions.

You can contribute up to £2,880 net per year into a pension for:

• A non-earning spouse
• A child

HMRC will add basic rate tax relief of £720, making a gross contribution of £3,600.

This can be a very efficient way to:

• Build long-term family wealth
• Introduce children to retirement saving early
• Utilise surplus income tax-efficiently

High Earners: Strategic Considerations

For those with substantial pension pots, the abolition of the LTA charge may alter strategic decisions.

You may wish to reconsider:

• Whether to continue making contributions
• Whether to delay retirement
• Whether to draw income earlier or later

However, the remaining lump sum cap and income tax implications still require careful modelling.

Practical Year-End Planning Checklist

Before 5 April 2026, consider:

• Reviewing unused allowance from 2022/23 (expiring soon)
• Confirming whether tapering applies
• Calculating adjusted income accurately
• Assessing whether contributions can restore Personal Allowance
• Checking employer contribution levels
• Reviewing long-term retirement objectives
• Taking regulated advice before accessing funds

Why Pension Planning Should Be Reviewed Annually

Pension tax rules are complex and frequently updated.

Your optimal contribution level may change each year depending on:

• Income levels
• Business profits
• Dividend timing
• Retirement plans
• Legislative changes

Regular review ensures you do not miss valuable relief.

Final Thoughts

Pension contributions remain one of the most powerful tax planning tools available.

In particular:

• Higher and additional rate taxpayers receive significant relief

• Income between £100,000 and £125,140 attracts effective 60% relief
• Carry forward opportunities may soon expire
• The abolition of the LTA has changed long-term strategy for larger funds

However, the tapered Annual Allowance, lump sum limits and income tax implications mean careful calculation is essential.

If you would like a personalised pension contribution review or help calculating your available Annual Allowance before the year end, Merranti Accounting can help you optimise your position while remaining fully compliant.