Tips to help boost your pension savings*
* All tax rates, allowances and rules are for the 2024/25 tax year and may change in future
Written by Jessica Rawlings
Paraplanner & Technical Administrator
1. Use your pension Annual Allowance
The Annual Allowance is the total that can usually be paid in across your pension plans in a tax year before a tax charge could apply. The allowance has been maintained at £60,000 for 2024/25 but could be less if you’re a higher earner (usually if you have ‘threshold income’ above £200,000), a non-earner or have started taking money from your pension savings.
If you’re paying into a pension plan, it’s important to clarify your allowance and check how much you’re paying into your plan, making sure that’s still right for your circumstances. You could consider paying more in before the end of the tax year to make the most of your allowance. If you’ve used all of your available allowance for the tax year, you may be able to use unused allowances from the last three tax years (known as ‘carry forward’).
Some workplace pension schemes – such as salary sacrifice schemes – offer tax benefits in a different way. You can check with your employer or adviser how this works for you if you’re not sure.
2. Top up your pension payments with tax relief
If you’re under age 75, you can get ‘tax relief’ on your personal pension contributions up to your pension Annual Allowance (see above) or your total relevant UK earnings – whichever is lower. This means your payments are boosted by a top up by the government.
For example, if you pay income tax at the basic rate of 20%, you can get a 20% top-up from the government on your payments into your pension. This means it would cost you £80 to get £100 paid in. Higher-rate taxpayers can get a 40% top up and additional-rate a 45% top up. If you’re a higher or additional-rate taxpayer, you may need to claim tax relief back from the government through a tax return, as they won’t automatically add anything above 20%.
3. Ask about your workplace pension plan
You may receive a workplace pension through your job. At least 8% of your ‘qualifying earnings’ usually need to be paid in with a minimum of 3% usually being paid by your employer and a minimum of 5% by yourself.
Some employers will pay in more than the minimum or match the percentage you’re paying into your plan up to a certain amount; it’s worth checking with your employer to see if they’d be willing to do this.
4. Consider bonus sacrifice
The tax year end often coincides with a business’ year end and, for some employees, this could mean a bonus payment. You may have the option to put some or all of a bonus payment into your pension plan. Exchanging a bonus for an employer pension contribution before tax year end can save on tax and both employer and employee National Insurance. The NI savings made could be used to boost pension funding, meaning you potentially keep more of your bonus in the long run. You could check if you employer offers this.
5. Business Owners
Often, directors will take a significant amount of their profits as a dividend. Dividend tax rates are less than income tax rates but are paid from profits after corporation tax. This can mean that using some of these profits to make an employer pension contribution with full corporation tax relief instead can be economically advantageous.
6. Retain your tax-free Personal Allowance
You usually have a ‘Personal Allowance’ each tax year, which is the amount of income you don’t have to pay income tax on. For most people it’s currently £12,570 (and has been frozen at this amount since 2021).
When your taxable income (specifically ‘adjusted net income’ is over £100,000, your Personal Allowance is reduced by £1 for every £2 over this amount. You therefore lose the Personal Allowance when once your adjusted net income exceeds £125,140.
Personal pension contributions can help reclaim some or all of your Personal Allowance as they’re seen as a deduction from earnings; tax savings can be made by paying into your pension plan as this can reduce your ‘adjusted net income’.
7. Retain your child benefit
The entitlement to child benefit is assessed on the highest earner of a household. The benefit is reduced by the ‘High Income Child Benefit Charge’ when the highest earner’s income (specifically ‘adjusted net income’) reaches £60,000; if one parent’s income reaches £80,000, the tax charge fully cancels out the benefit. These thresholds have increased from 2023/24, offering parents the potential for a higher level of income before their child benefit is affected.
In 2024/25, the child benefit rates for the eldest or only child is £25.60 per week and £16.95 for each additional child, a total of £2,212.60 a year for a family with two children.
Making a personal pension contribution could reduce what counts as income; depending on how much is contributed, it could offer the opportunity to reclaim some or all child benefit.
Even if your earnings mean you face the High Income Child Benefit Charge, you could still consider filling in the child benefit claim form to help you get National Insurance credits which go towards your State Pension.
8. Funding someone else’s pension
Many people don’t know that you can top up pensions for your partner or spouse. For your partner or spouse to receive tax-relief on the contributions, the limit is usually 100% of their income, subject to the Annual Allowance of £60,000. Tax relief will be given at your partner’s marginal rate of tax.
Of course, the opportunity to fund someone else’s pension doesn’t stop at spouses and partners, third party contributions can be made to children and grandchildren as gifts, with the recipient being able to benefit from tax relief on the gift. Regular gifting in this way from surplus income could be very efficient from an Inheritance Tax perspective as the gifts may be immediately outside of the donor’s estate for IHT if exemption conditions are met.
Pensions remain the most tax efficient way to save for retirement for most people. It is often only at the end of the tax year that you have all the information needed to use the available allowances and reliefs in the most tax efficient way. Allowances not used before the end of the tax year are usually lost.
Should your budget allow and you wish to consider increasing your monthly payments or making a one-off payment to a pension before the end of the tax year, please contact your adviser.