Saving for retirement is a crucial aspect of financial planning. Maximising pension contributions is one of the most effective ways to secure a comfortable retirement while also reaping tax benefits. As a professional accounting firm, GHLD aims to guide our clients through the intricacies of pension contributions and ensure they make the most of the available tax reliefs. This blog will outline the key strategies for maximising pension contributions and highlight the associated tax advantages.

Understanding pension contribution limits

To maximise pension contributions effectively, it’s essential to understand the annual and lifetime limits set by the government. For the tax year 2024/25, the annual allowance is £60,000. You can contribute this maximum amount to your pension each year without incurring tax charges. Contributions above this limit may be subject to an annual allowance charge.

Carry forward rule

If you haven’t used your full annual allowance in the previous three tax years, you can carry forward the unused allowance to the current tax year. This rule allows you to make larger contributions in the current year and still receive tax relief. To qualify, you must have been a member of a registered pension scheme during those years.

For example, if you contributed £20,000 in each of the past three years, you would have £60,000 of unused allowance. Combining this with your current year’s allowance, you could potentially contribute up to £100,000 this year and still benefit from tax relief.

Maximising employer contributions

Employer contributions to your pension scheme can significantly boost your retirement savings. It’s beneficial to take full advantage of any employer matching schemes, where your employer matches your contributions up to a certain percentage of your salary. This enhances your pension pot and provides immediate tax relief since employer contributions are typically made before income tax is applied.

If your employer offers salary sacrifice schemes, consider participating. In a salary sacrifice arrangement, you agree to reduce your salary by a certain amount, which your employer then contributes to your pension. This reduces your taxable income, resulting in lower income tax and National Insurance contributions.

Tax relief on personal contributions

Personal contributions to a pension scheme attract tax relief at your marginal income tax rate. For basic rate taxpayers, the government adds 20% to your pension contributions. Higher rate taxpayers can claim an additional 20% tax relief through their self-assessment tax return, while additional rate taxpayers can claim an extra 25%.

For example, if you’re a higher rate taxpayer contributing £8,000 to your pension, the government will add £2,000, making a total contribution of £10,000. You can then claim an additional £2,000 through your tax return, resulting in a total tax relief of £4,000 on an £8,000 contribution.

Making the most of pensions before retirement

As you approach retirement, reviewing your pension strategy to maximise your contributions and tax relief is essential. Consider making additional contributions if you have unused annual allowances from previous years. This is particularly relevant if you anticipate higher income in retirement and want to benefit from the maximum possible tax-free lump sum, currently 25% of your pension pot.

Additionally, be mindful of the tapered annual allowance, which affects individuals with adjusted incomes over £260,000. The allowance is reduced by £1 for every £2 of income above this threshold, down to a minimum of £10,000. Careful planning can help mitigate the impact of this tapering and ensure you maximise your contributions without incurring additional tax charges.

The importance of professional advice

Understanding the rules and regulations around pension contributions and tax relief can be complex. Seeking professional advice is crucial to making informed decisions that align with your financial goals. At GHLD, we provide personalised guidance to help you optimise your pension contributions and take full advantage of available tax reliefs.

Key statistics and sources:

• The annual allowance for pension contributions is £60,000 for the tax year 2024/25.
• Basic rate taxpayers receive 20% tax relief on personal contributions.
• Higher rate taxpayers can claim an additional 20% tax relief through their self-assessment tax return.
• Additional rate taxpayers can claim an extra 25% tax relief.

The bottom line

Maximising pension contributions offers substantial benefits, including significant tax relief and enhanced retirement savings. By understanding the annual and lifetime limits, utilising the carry forward rule, maximising employer contributions, and seeking professional advice, you can optimise your pension strategy and secure a more comfortable retirement.

If you need assistance with your pension planning or have any questions about maximising your contributions, please contact us. GHLD is here to support you in achieving your financial goals and ensuring you maximise your pension opportunities.

Note: GHLD are unable to recommend specific pension products, however, we can recommend independent financial advisers for more specific pension advice.