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Planning for retirement

Pensions are one of the most tax efficient ways to save and strategic planning around contributions remains one of the most important tax planning tools available. However, changes to salary sacrifice contributions announced in the Autumn Budget, in addition to upcoming adjustments to the Inheritance Tax rules on unused pension funds, serve to highlight the value of planning for retirement. Here, we look at the latest changes and putting tax-efficient plans into action.

Salary sacrifice removal

The removal of full tax-free salary sacrifice is due to come into effect from 6 April 2029. This will see a new £2,000 limit on the amount of contributions employees can make into a salary sacrifice scheme free of tax and National Insurance contributions (NICs), hitting schemes run by UK employers.

Almost eight million employees currently use salary sacrifice to make pension contributions. Of these, over three million sacrifice more than £2,000 of salary or bonuses.

Supports and incentivises

The government said: ‘The government supports and incentivises pension saving and has retained Income Tax and NICs reliefs on pensions contributions that are worth over £70 billion per year.

‘Most other salary sacrifice opportunities were closed in 2017. Salary sacrifice for pensions contributions remains, and its cost as a relief has increased markedly from £2.8 billion in forgone NICs in tax year 2016 to 2017, rising to £5.8 billion in tax year 2023 to 2024. Were no changes made, it is expected that this would nearly triple to £8 billion by tax year 2030 to 2031.’

Pension planning 

Taxpayers benefit from tax relief on contributions at their marginal rate. Tax relief is available on contributions in any given tax year up to the higher of 100% of net relevant earnings, or £3,600 (gross).

Complex rules limit tax relief on high levels of contribution. The annual allowance limits the amount of tax-relieved pension saving that can be made per year. The annual allowance remains at £60,000 for 2025/26. A tax charge can arise if annual pension contributions go above this limit. 

Lower annual allowance for higher levels of income

A lower, tapered, annual allowance can apply for those with high income: high income for this purpose means having ‘threshold income’ (broadly, taxable income) more than £200,000, and ‘adjusted income’ (broadly threshold income plus pension contributions by the employer) more than £260,000. 

Generally, for adjusted income more than £260,000, the taper reduces the annual allowance by £1 for every £2 of the excess, down to a minimum allowance of £10,000 where adjusted income is £360,000 or more.

Use annual allowance from earlier years

A carry forward of unused annual allowance is available for three years. This is useful for individuals who may have uncertain income streams or in situations where the ‘owner managed business’ company employer has fluctuating profits, allowing higher contributions to be made in a given tax year where there is brought forward capacity available.

For 2025/26, the unused allowance that can be brought forward is from 2022/23, 2023/24 and 2024/25, provided the individual was a member of a registered pension scheme at some time during the relevant brought forward tax year. Note however, that the annual allowance available for 2022/23 was only £40,000.

Keeping track of pension savings

It is not unusual for people to lose track of some or all their pension savings over time. Figures suggest that some 3.3 million pension pots, containing £31.1 billion in assets, are ‘lost’. The average size of a lost pot is highest among those aged 55 to 75, at around £13,500.

Some pension providers offer a pension tracing, checking and consolidation service to help here. There is also a government Pension Tracing Service. Looking forwards, the government is promoting the roll-out of the pensions dashboard, an online tool giving access to individual pensions information online, securely and all in one place. Though there is no firm date for public access to the tool yet, it is expected to help significantly.