Use your allowances
This is the second year in which you can save up to £60,000 tax-free
Welcome to the 20242025 tax year – and a whole new set of allowances to help you save tax-efficiently using private pensions. This is the second successive tax year in which the new higher annual allowance for pension contributions applies, bringing further opportunities to maximise your savings.
For most people, this year’s annual allowance is £60,000. This includes all pension contributions made by you, your employer or anyone else, as well as any basic-rate tax relief added by the state.
Your pension provider will usually claim this basic-rate relief automatically on your behalf (higher- and additionalrate taxpayers can then claim additional relief through their tax returns). But you’re only entitled to tax relief on contributions of up to 100% of your earnings.
Helpfully, while this allowance is described as annual, it is still possible to exploit unused contribution allowances from previous tax years. The carryforward rules allow you to look back at the past three tax years to identify unused allowances and add them to this year’s allowance.
For example, if you made £30,000 of pension contributions in each of the past three tax years, you would have unused allowance of £10,000 from both 2021-2022 and 2022-2023 (when the annual allowance was £40,000) and £30,000 from 2023-2024. Your full annual allowance this year would therefore effectively be £110,000.
A couple of caveats apply to the annual allowance regime. Firstly, if you have started withdrawing money from your savings via an incomedrawdown plan, you get a lower annual allowance of £10,000. The idea is to stop savers withdrawing pension benefits they’ve already had tax relief on and then reinvesting them to get another slice of relief. Importantly this lower limit, known as the money purchase annual allowance (MPAA), does not usually apply to contributions made to defined-benefit pension schemes, where your employer guarantees the value of your benefits in retirement. If you’re still a member of one of these schemes, you’ll benefit from an annual allowance of £50,000, the normal annual allowance minus the MPAA.
The other trap to watch out for is that very high earners lose some of the benefits of tax relief on pension contributions. This applies if your earnings, including your employer’s pension contributions, go above £260,000. For these savers, a tapered annual allowance applies. You lose £1 of allowance for every £2 beyond the £260,000 threshold. Someone with earnings of £280,000, for example, would have an annual allowance of £50,000 this year. This taper continues until your earnings reach £360,000; from then on, your annual allowance is £10,000, no matter how much you earn.
If you are not entirely certain how any of these rules apply to your personal situation, you should get professional advice because exceeding the annual allowance is likely to land you with a tax charge. This tax effectively removes the relief given on contributions above the annual allowance and is payable at your normal rates of income tax. The charge will be added to your tax bill on the rest of your income, and can come as a nasty shock.
“Very high earners forefeit some of the benefits of tax relief”