Maximising Pension Savings in 2025 26 A Guide for Savers
As we approach the new tax year, it is crucial for individuals to understand the current landscape of pension savings and the associated tax implications. At Cutts and Co Accountancy, we aim to provide you with a comprehensive overview of the key changes and opportunities in pension savings for the 2025 26 tax year.
Annual Allowance and Carry Forward
The annual allowance for the 2025 26 tax year remains at 60000 pounds, but it is essential to note that this can be reduced for higher earners due to the tapered annual allowance. For those earning over 200000 pounds, the annual allowance can be tapered down to as low as 10000 pounds.
However, there is an opportunity to maximise your pension contributions by utilising the carry forward rule. This allows you to use any unused annual allowance from the last three years, potentially enabling contributions of up to 200000 pounds in a single year, provided you have sufficient relevant UK earnings to support these contributions.
Tax Relief on Contributions
Pension contributions continue to be a tax efficient way to save for your future. You automatically receive tax relief at 20 percent on the first 2880 pounds you pay into a pension each tax year, regardless of your income tax band, as long as you have sufficient earnings.
For higher earners, the tax relief can be even more beneficial. If your tax position in retirement is likely to be the same as or lower than your current tax position, the tax relief received on contributions can effectively mirror the tax payable when benefits are taken, making it a tax neutral investment.
Lifetime Allowance Changes
One of the significant changes in the pension landscape is the scrapping of the Lifetime Allowance charge. This means that individuals who had previously limited their pension contributions to avoid exceeding the LTA can now recommence their savings without the fear of incurring additional tax charges.
Instead of the LTA, two new allowances have been introduced the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance. The Lump Sum Allowance sets a limit of 268275 pounds for tax free lump sums, while the Lump Sum and Death Benefit Allowance limits all tax free lump sums to 1073100 pounds. These allowances cover lump sums taken at retirement, serious ill health lump sums before age 75, and death benefits received within two years of the individual’s death.
Investment Growth and Tax Efficiency
Pensions remain an attractive option for saving due to their tax efficient nature. Contributions to pensions are made before income tax and capital gains tax, allowing your savings to grow free from these taxes. Given the recent squeeze on CGT allowances and the upcoming increases in CGT rates in October 2024, maximising pension contributions can be particularly beneficial for investors seeking unfettered growth.
Conclusion
The 2025 26 tax year presents several opportunities for individuals to boost their pension savings. By understanding and leveraging the annual allowance, carry forward rules, and the new allowances replacing the Lifetime Allowance, you can make the most of the tax relief available.
At Cutts and Co Accountancy, we recommend reviewing your current pension strategy to ensure it aligns with the latest tax regulations and your financial goals. Whether you are a high earner looking to maximise your contributions or an individual seeking to make the most of tax relief, now is an excellent time to reassess and potentially increase your pension savings.
For personalised advice and to ensure you are making the most tax efficient decisions, contact us at Cutts and Co Accountancy. Our team is here to help you plan for a secure financial future.
