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A big jump in pension tax relief at higher and additional rates could make it a target for the Chancellor in this year’s Budget, experts warn.
Personal income tax relief on contributions made by employers, employees and the self-employed totalled around £54.2 billion in 2023 to 2024, according to analysis of HMRC’s private pension data carried out by wealth management firm Evelyn Partners. This was up from £47.8 billion in the previous year. Of the £54.2 billion, 68% consisted of higher or additional rate tax relief.
David Little, Financial Planning Partner at Evelyn Partners, said: “One of the more eye-catching data points is the size of pension income tax relief, and within that the amount that is accounted for by higher and additional rates of tax, which jumped quite significantly compared to the previous year. With the Autumn Budget on the horizon and the public finances in a parlous state, you can’t help thinking that this will be noticed in the Treasury.
“That’s not to say that withdrawing higher rates of pension tax relief is necessarily the right or sensible thing to do – or that it is very likely to happen. It would be potentially very complicated and administratively costly, and the Chancellor would have to employ some sleight of hand with some sort of carve-out to forestall trouble with higher-paid public sector workers.”
Here, we explain why pension tax relief is so important, and some of the things you’ll need to consider if you’re looking to make the most of tax rules as they currently stand.
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Why is pension tax relief so valuable?
Pension tax relief is one of the best things about pensions, as it essentially means the tax man tops up any contributions you make.
Most UK taxpayers automatically get tax relief on pension contributions at the basic rate of tax which is 20%. So, if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax. Higher rate taxpayers who pay income tax at a rate of 40% can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. You’ll usually get 20% of this back automatically and then will have to claim the remaining 20% through your tax return or by calling HMRC.
Similarly, if you’re an additional rate taxpayer, you can claim an additional 25% on top of the usual 20%, giving you total pension tax relief of 45%, which means a £100 contribution into your pension will only set you back £55. Find out more about tax relief and claiming higher rate tax relief in our guides How pension tax relief works and How do I reclaim higher rate pension tax relief?
You’re only entitled to tax relief on a certain amount of pension contributions each tax year, known as your annual allowance, which for the 2024/25 tax year is £60,000.
In addition to the tax relief benefits that pensions offer, they are not liable to capital gains or dividend tax either, so they provide an extremely tax efficient way to save.
What changes to tax relief could the Chancellor make?
Without a crystal ball, it’s impossible to know what changes, if any, the Chancellor will make to pension tax relief in her Budget this Autumn.
Some commentators claim she might announce a move to a flat rate of tax relief, with others speculating that we could see the introduction of a 30% flat rate for everyone, or even everyone levelled down to the basic rate of 20%.
John Havard, a consultant at Blick Rothenberg, said: “Rachel Reeves has taken all her easy choices for increasing tax revenue off the table by sticking with her manifesto promises. But one option that remains open to her is targeting pension tax reliefs.
“However, there is a competing agenda for Labour if the Chancellor targets pension reliefs, as they are trying to encourage people to save more for retirement. The Government’s argument will likely be that as a disproportionate percentage of relief goes to fund the retirements of the ‘better off’, it is not fair for ‘ordinary working people’ to be subsidising the retirement of the ‘wealthy.’ This was the reason given for changes to the rules when George Osborne was Chancellor.
“But the actual percentage of relief going to ‘wealthy’ taxpayers may not be as persuasive today. Firstly, the introduction of auto-enrolment has added large numbers of ‘ordinary working people’ to the pool of individuals benefiting from tax relief on their pension contributions. Secondly, changes made by the coalition government greatly restricted how much relief can be claimed by the highest earners.”
Could you take advantage of carry forward rules?
If you pay into a defined contribution pension, sometimes known as a money purchase pension, you can pay in up to 100% of your earnings into your pension each tax year, up to a maximum Annual Allowance of £60,000 in the 2025/26 tax year. If you’ve already used up this year’s annual pension allowance, you may want to consider whether you have any unused annual allowances from the three previous years, which you might be able to use under carry forward rules. These provide the potential to boost your contributions up to a maximum of £200,000 this tax year, as long as you earn at least that much each year.
Mr Hollands said: “Use of carry forward means someone has the potential to make a very large pension contribution ahead of any possible changes to pension tax reliefs.
“It is wise to seek out some professional advice to work out how much you could contribute and still benefit from the tax reliefs, as this will depend on your earnings. For example, the very highest earnings are subject to a complex calculation on their pension allowances, which are tapered down from the maximum allowance dependent on their total earnings across all sources of income.”
Under these tapered allowance rules, in the 2025/26 tax year for every £2 you earn over £260,000 (which is the adjusted income threshold), your annual allowance will reduce by £1. The lowest your annual allowance will be reduced to is £10,000, which is known as the minimum tapered annual allowance. For example, if you earn more than £312,000, your maximum annual allowance will be £10,000. That means if you’d made no contributions to your pension in the previous tax year, you would have £10,000 to pay into your pension this tax year using carry forward.
Learn more about the pros and cons of taking advantage of carry forward rules in our guide Should you take advantage of pension carry forward rules ahead of the Budget?
What if you’ve already started taking an income from your pension?
If you’ve already started taking an income from your pension, you need to be careful about how much you pay into your pension, because your annual allowance might have reduced. Usually, the maximum amount you can pay into a pension each year and get tax relief is £60,000, but if you start taking taxable income, the Money Purchase Annual Allowance (MPAA) is triggered. This lowers your annual allowance to £10,000, including any contributions from your employer.
The MPAA is there to prevent people from taking money out of their pension, and then recycling the same money back into their pension to benefit from the upfront tax relief.
Ms Morrissey said: “However, the MPAA isn’t triggered if you only draw tax-free cash or buy a lifetime annuity. So if you plan to continue beefing up your pension savings, the choices you make here are crucial.”
Find out more about how the MPAA works in our guide What is the Money Purchase Annual Allowance?
A final thought…
It’s important to remember that no changes to pensions have been announced yet, so don’t rush into making any decisions unless you’re certain you’re doing the right thing for you and your retirement savings.
Gary Smith, of Evelyn Partners, said: “We can expect a rerun of last summer’s uncertainty, unless the Treasury rules out such moves. That it hasn’t, again – despite calls from stakeholders in the financial services sector to do so – can only leave people to suspect that pensions are on the table for the Budget.
“It’s worth pointing out that any serious moves to curtail the preferential tax treatment of pensions threaten an outcry from public sector employees and schemes. The withdrawal of the Lifetime Allowance and the increase to the Annual Allowance under the last Government were in large part driven by demands from senior consultants and other highly paid public sector staff. A move to curtail the higher rates of pension tax relief would run into even more widespread public sector opposition.
“As always we would encourage anyone thinking of shifting significant sums around to take regulated financial advice.”
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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