- Home
- Pensions & Retirement Planning
- Pension tax relief, allowances, and law
- Will the Budget target pension tax relief?
Speculation that tax relief could be targeted in the Budget is prompting many pension savers to look at ways they can make the most of current generous rules ahead of any potential changes.
According to investment service interactive investor, the number of its customers contributing the maximum £60,000 allowed into their self-invested personal pension (SIPP) is up 64% since the start of the tax year to 23 September, compared to the same period in 2023. The service has also seen the volume of one-off contributions – excluding regular monthly contributions – jump by 31% over the same period. Hargreaves Lansdown similarly has reported a 71% rise in the number of people making full use of their annual allowance this tax year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “Pension allowances provide a powerful incentive to save for the future and we’ve seen a surge in people maxing out their SIPPs so far this year in response to rumours that the Chancellor might have the annual allowance or tax relief in her sights.
“As a higher or additional rate taxpayer, you’re benefiting enormously from tax relief that would see a £60,000 contribution cost just £36,000 for a higher rate taxpayer and £33,000 for someone paying additional rate tax.”
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.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,250 reviews on VouchedFor, the review site for financial advisors.
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 on October 30.
Some commentators expect her to announce a move to a flat rate of tax relief, with some claiming that we could see the introduction of a 30% flat rate for everyone, whilst others believe we could see everyone levelled down to the basic rate of 20%.
Jason Hollands, Managing Director at leading wealth management firm Evelyn Partners, said: “Either step would weaken the tax benefits of pension saving for high earners, which might fit with the Government’s warning that the financial burden should be borne by “those with the broadest shoulders.
“Many higher earners might consider ramping up their pension contributions, as pension saving can afford some protection against the growing tax burden inflicted by frozen income tax thresholds. Even if pension tax relief survives unscathed in this Budget it might be best to “grab it while you can” – and as research suggests many workers are not saving enough to fund a decent retirement, then this could be a good time to raise monthly contributions.
“This might especially apply to those who are fast approaching retirement, for example, people in their fifties, but who fear their pension pot is not going to provide a desirable income. This might include those who started their own businesses and were not able to contribute in the past – e.g. during tough times such as the pandemic – or who were struggling with bringing up families and paying big mortgages, but can now play catch-up.”
Get your free no-obligation pension consultation
If you’re considering getting professional financial advice, Fidelius is offering Rest Less members a free pension consultation. It’s a chance to have an independent financial advisor give an unbiased assessment of your retirement savings. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor. Capital at risk.
Could you take advantage of carry forward rules?
If you’ve used up this year’s annual pension allowance already, 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 2024/25 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 reduce 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 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 to into making any decisions unless you’re certain you’re doing the right thing for you and your retirement savings.
Myron Jobson, Senior Personal Finance Analyst at interactive investor, said: “With the swirling rumours of changes to the UK pension regime, it’s understandable that many might feel a bit jittery about the future of their retirement savings. However, it’s crucial not to let speculation drive hasty and irreversible decisions when it comes to your pension.
“Pensions are inherently long-term investments, and their benefits, like tax relief on contributions and potential employer matches, are designed to grow over time. Knee-jerk reactions to unverified rumours can lead to costly mistakes, such as unnecessary charges or missed growth opportunities.
“Remember, any significant policy shifts typically go through extensive consultations and legislative processes. This means you’ll likely have ample time to understand and adapt to any confirmed changes. It’s wise to keep an ear to the ground, staying informed about potential changes. But more importantly, base your decisions on solid financial advice and verified information.”
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,250 reviews on VouchedFor, the review site for financial advisors.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
Melanie Wright is money editor at Rest Less. An award-winning financial journalist, she has written about personal finance for the past 25 years, and specialises in mortgages, savings and pensions. She is a former Deputy Editor of The Daily Telegraph's Your Money section, wrote the Sunday Mirror’s Money section for over a decade, and has been interviewed on BBC Breakfast, Good Morning Britain, ITN News, and Channel Five News. Melanie lives in Kent with her husband, two sons and their dog. She spends most of her spare time driving her children to social engagements or watching them play sport in the rain.
* Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.
Get your free no-obligation pension consultation
If you’re considering getting professional financial advice, Fidelius is offering Rest Less members a free pension consultation. It’s a chance to have an independent financial advisor give an unbiased assessment of your retirement savings. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor. Capital at risk.