New Tax Year, New Opportunities: What You Should Know About Your Pension In 2025/26

As we enter a new tax year, it’s a great time to take stock of your pension and make sure you’re making the most of the opportunities available. Here are the key updates and considerations for 2025/26 to help you stay ahead and get the best value from your retirement planning.

TAX RELIEF STILL GOING STRONG

The good news? The rules around tax relief on pension contributions remain unchanged, which means you can still enjoy valuable tax breaks when paying into your pension.

With wages on the rise and income tax thresholds frozen, many people may now benefit from even more generous tax relief than before. This could make pension contributions an even smarter way to save for the future.

ANNUAL ALLOWANCE & CARRY FORWARD – WHAT YOU CAN PAY IN

Most people can still contribute up to £60,000 into their pension this year. If you haven’t used all your allowance in recent years, you might be able to “carry forward” unused amounts from the past three tax years — giving some individuals a total contribution limit of up to £220,000 this year.

This is especially useful for business owners or those who haven’t contributed much in recent years and want to catch up.

HIGH EARNERS, WATCH OUT FOR TAPERING

If your income is above £200,000, you could be affected by what’s known as “tapering,” which reduces how much you can contribute to your pension each year. Once your income (including bonuses and employer pension contributions) hits £260,000, your annual allowance starts to shrink, and it bottoms out at £10,000 once your income reaches £360,000.

If your income has increased recently, especially through bonuses or pay rises, it’s worth checking whether your pension contributions need adjusting to avoid an unexpected tax charge.

RECLAIM YOUR PERSONAL ALLOWANCE WITH PENSION CONTRIBUTIONS

If you earn between £100,000 and £125,140, you’re in a particularly steep tax zone — often called the “60% tax trap.” This happens because your personal tax-free allowance gets gradually withdrawn.

But here’s the good news: making pension contributions can help. For example, someone earning £125,140 who contributes £25,140 to their pension could reduce their tax bill by over £15,000. If your employer offers salary sacrifice, those savings can be even greater.

BIGGER NIC SAVINGS THROUGH SALARY SACRIFICE

With the employer National Insurance rate rising by 1.2%, pension contributions made through salary sacrifice are even more beneficial. Your employer may pass some or all of these savings on to you, making your pension contributions even more cost-effective.

It’s a great time to speak to your employer or financial planner about whether salary sacrifice is available — and whether you’re making the most of it.

LUMP SUM ALLOWANCES – STILL IMPORTANT

We’re now in the second year of new rules around how much you can take as a tax-free lump sum from your pension. The maximum remains at £268,275, while the total amount you can build up in your pension without triggering extra tax is £1,073,100.

While these limits cap how much tax-free cash you can take, there’s still no upper limit on how much income you can draw from your pension. And with pension savings continuing to grow tax-free, contributing to a pension remains a very tax-efficient way to save — even if you’ve already used up your tax-free lump sum.

RETIREMENT INCOME: TIME TO REBALANCE?

If you’re already drawing income from your pension or other investments, the start of the tax year is a great time to review your strategy. The personal allowance and basic rate tax bands remain frozen, so if you’re already making full use of these, there’s limited scope to increase your tax-efficient withdrawals — but a review may still reveal smarter ways to draw income.

INHERITANCE TAX ON PENSIONS – A BIG CHANGE AHEAD

Looking further ahead, from April 2027, pension savings may start to be counted towards your estate for inheritance tax purposes. This would be a big shift, especially for those who planned to leave their pension pots untouched to pass on to loved ones tax-free.

While we’re still waiting on final details from HMRC, it’s wise to begin thinking about your options now. Reviewing your estate plan early could help you stay ahead of any changes and ensure your pension still fits into your long-term plans.

IN SUMMARY

This new tax year brings a host of opportunities — and a few changes — that could impact your pension strategy. Whether you’re still building up your pension, approaching retirement, or drawing income, now’s the perfect time to check in on your plan.

If you’d like help understanding how these changes affect you or exploring ways to make the most of your pension, please reach out to us here.

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Source: Techlink

Date written: 15^th April 2025

Approved by Evolution Wealth Network Ltd on 15/04/2025.