Can I pay less tax by paying more into my pension?

Pension contributions can be highly efficient, but there are limits on how much relief you can receive each year.

When you pay into your pension, your contribution automatically receives 20% basic-rate Income Tax relief. If you’re a higher- or additional-rate taxpayer, you can then claim a further 20% or 25% relief through your Self Assessment return.

The Annual Allowance is the upper limit of tax relief you can receive on your pension contributions each year.

For most people in the 2025/26 tax year, the Annual Allowance is £60,000 or 100% of your earnings, whichever is lower. You can also backdate any unused allowances up to three tax years (providing you’ve held the pension in those tax years), using the carry-forward rule. This means you may be able to make potentially significant one-off pension contributions – perhaps after a windfall – and receive full tax relief.

Any contributions you make above your Annual Allowance can still benefit from the long-term growth potential of pension investments, but won’t receive any tax relief.

In certain circumstances, your Annual Allowance may be lower than the standard.

For example, if you’ve already accessed your pension funds and you then make further contributions, you trigger the Money Purchase Annual Allowance (MPAA). This reduces your allowance for tax-efficient contributions, usually to £10,000.

Or, if your adjusted income (your taxable income plus any employer pension contributions) exceeds £260,000, your Annual Allowance tapers by £1 for every £2 over the limit. Once your income reaches £360,000, you’ll have an Annual Allowance of £10,000, which is the minimum it can taper to.

An independent financial planner can help you make the most of your pension contributions, ensuring you maximise the potential for growth while supporting your immediate needs and remaining within your allowances.

While your pension contributions receive relief up to your Annual Allowance, your future withdrawals are taxable once they exceed your tax-free lump sum.

The tax-free lump sum allows you to withdraw the first 25% of your pension without paying Income Tax, up to the maximum Lump Sum Allowance of £268,275 (2025/26).

Once you’ve withdrawn the tax-free portion of your pension, any further withdrawals are liable for Income Tax if they take you above the Personal Allowance.

However, your pension will be taxed at your marginal rate at the point of withdrawal, not the point of contribution. This means you could receive up to 45% relief on your contributions but only pay 20% tax on your withdrawals.

You can also balance your pension withdrawals with other tax-efficient savings, such as ISAs, to help ensure more of your income remains untaxed.

An independent financial planner can work with you to plan your withdrawal strategy and balance it with other savings you may have, so your retirement income is sufficient for your needs and faces minimal tax.

Alongside the personal tax advantages pensions can provide, there are further potential benefits if you’re a business owner and make contributions through your company.

Doing so comes with two key advantages:

• Reduced Corporation Tax – HMRC typically treats employer pension contributions as an allowable business expense. This means you can deduct the contribution from your company’s profits before tax is calculated, lowering the overall Corporation Tax liability.
• Savings on National Insurance contributions – Unlike salary payments, employer pension contributions are not subject to employer or employee National Insurance. So, putting profits in a pension rather than taking them as income can reduce the overall tax paid by the business.

As with all pension strategies, the rules can be complex, so it’s important to work with an independent financial planner to ensure the contributions are effective for both you and your business.

If you’ve already used your own Annual Allowance and would like to support a loved one’s long-term financial future, you could also contribute to their pension.

Any contributions you make on another person’s behalf will receive tax relief at the recipient’s marginal rate, provided the total payments remain within their Annual Allowance, including the carry-forward rules.

This means you can make potentially significant contributions to someone else’s pension, which could form part of a broader estate planning strategy to transfer wealth efficiently.

Even if the recipient has no income, such as a child or a partner who’s out of work, you can still contribute up to £2,880 per tax year. When combined with basic-rate tax relief, this will automatically increase to £3,600. However, carry-forward rules don’t apply when the recipient has no earnings.

Helping family members build their pension savings can reduce the size of your estate for Inheritance Tax purposes and support your loved ones’ financial futures. So, it’s a good idea to speak to an independent financial planner to see whether such contributions could fit into your plan.