With just over ten working days remaining until the end of the tax year, savers are being urged to look beyond ISAs and not forget the importance of pensions - one of the most tax-efficient ways to build long-term wealth.
Maike Currie, VP Personal Finance at PensionBee, says: “At a time of record-high taxes and frozen thresholds, it’s more important than ever to make full use of the tax breaks available when managing your finances and planning for your future.
“Against that backdrop, it’s no surprise people focus on ISAs at this time of year - but pensions deserve equal attention. For many, the tax advantages can be even more powerful if used correctly.”
1. Know your annual allowance – and use carry forward
You can receive pension tax relief on any contributions you may, in respect of 100% of your salary, capped at £60,000 gross for 2025/2026. This amount is known as the annual allowance and any contributions that you make over this limit are taxed at your highest rate.
Higher earners should be aware of the tapered annual allowance, which can reduce this limit to £10,000 once income exceeds certain thresholds.
Crucially, savers can also carry forward allowing them to maximise unused pension allowances from the previous three tax years – potentially enabling much larger contributions before the tax year end. Carry forward is relatively straightforward to use, but you can’t receive tax relief on contributions in excess of your earnings in any tax year, and you need to have been a member of a pension during that time.
“Carry forward can be particularly important for those who have taken career breaks or worked part-time to supercharge their pension savings when they return to work. It can also be extremely valuable to high earners, who are caught by the tapered annual allowance.”
2. Use pension contributions to defend against the 62% tax trap
For higher rate taxpayers, pensions can be especially powerful. Those earning between £100,000 and £125,140 face an effective 62% marginal tax rate due to the withdrawal of the personal allowance. Pension contributions can reduce your adjusted net income and help restore your personal allowance.
More people are being pulled into higher tax bands due to frozen thresholds. The number of higher rate taxpayers has already risen by 78% since 2020, with around one in five workers now paying higher or additional rate tax – a figure expected to rise to nearly a quarter by 2030.
As income above £100,000 (measured as adjusted net income) removes eligibility for 30 hours of free childcare, increasing pension contributions to reduce your adjusted net income below this threshold can also help restore this benefit.
“This is no longer just an issue for the very highest earners,” said Maike Currie, VP Personal Finance at PensionBee. “More middle-income workers are being caught by higher tax rates, often without even realising it. Making pension contributions if you’re earning in this range can be incredibly efficient. It can significantly reduce your effective tax rate.”
If you’re enrolled in a workplace pension that permits salary sacrifice, this is one of the simplest ways to do this, with the added benefit of national insurance savings. If you pay into a personal pension that operates relief at source, the provider will add 20% tax-relief, and you will need to claim the incremental back via self-assessment.
3. Don’t overlook pensions for non-earners and children
Even if you’re not working, you can still contribute to a pension. Up to £2,880 can be paid in each year and topped up to £3,600 with basic rate tax relief.
It’s also possible to contribute to someone else’s pension – and you don’t need to be married or in a civil partnership to do so. Contributions can be made into a partner’s pension, or even for children via a Junior SIPP, helping to build long-term savings early on.
Importantly, tax relief is based on the pension holder’s circumstances, not the person paying in. This means contributions into a non-earner or basic-rate taxpayer’s pension will receive basic rate tax relief, even if funded by a higher rate taxpayer.
“Third-party contributions can be particularly powerful,” said Currie. “They can support those who may be taking time out of work – for example, due to caring responsibilities – and help address longer-term savings gaps.”
4. Near retirement? Tax year end means thinking about your withdrawal strategy
As you approach retirement, how you take your pension becomes just as important as how you build it. Pension withdrawals, outside of the tax-free lump sum, are subject to income tax so taking large one-off sums without planning can push you into a higher or additional rate tax band.
With pensions set to become liable for inheritance tax from April 2027, more people may consider accessing larger sums earlier. This makes it even more important to think strategically about timing - remember that your pension needs to last for the duration of your life in retirement and unnecessary withdrawals will reduce the money available later.
If you do expect to need the money in the near future, you may consider phasing your withdrawal to utiilise any unused lower-rate tax bands in the current year – rather than having a larger withdrawal push you into a higher tax bracket in a single year later on.
Planning ahead can help smooth your tax position and maximise what you keep.
5. Use a pension to hold on to more of your bonus
With bonus season coinciding with the end of the tax year for many workers, directing some or all of a bonus into a pension can be a highly tax-efficient move. Instead of taking the full amount as income – and losing a significant portion to tax – you can use it to boost your retirement savings with the added benefit of tax relief.
Using salary sacrifice can make this even more efficient, as contributions are made from your gross salary. This not only reduces your income tax bill but can also lower national insurance contributions, increasing the overall value of your bonus. Savers should look to make the most of this while the current rules around salary sacrifice remain in place.
For higher earners, so-called ‘bonus sacrifice’ can be particularly powerful to avoid being pushed into higher tax brackets or to mitigate the impact of the 62% tax trap.
Maike Currie, VP Personal Finance at PensionBee, said: “While ISAs offer the benefit of access should you need the money, pensions are one of the most powerful wealth-creating tools at your disposal. Their long-term nature means they benefit from compounding returns, alongside the boost of ‘free money’ in the form of tax relief and, for many, employer contributions.
“It’s not a case of either/or – the most effective approach is to use both if you can - prioritising pensions for long-term wealth growth, alongside ISAs for flexibility. With the tax year end fast approaching, and a raft of pension rule changes on the long-term horizon, now is the time to power up your pension.”
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