Financial experts at Aberdeen Adviser are urging savers to consider using their pension to manage their tax bill or retain valuable child benefits before allowances reset at the end of the tax year.
With only days to go before the 2025/26 tax year begins, time is running out for people to make the most of opportunities to use pension saving in conjunction with their other saving allowances.
Andy Zanelli, head of technical engagement at Aberdeen Adviser, the UK’s second largest adviser platform by assets, explained: “When you think pensions, you naturally think retirement saving. But their impact can be so much more when they’re used as part of a broader financial plan.
“Pension saving can reduce what’s counted as ‘income’, which in turn can help you manage your risk of being pulled into higher income tax bands and your eligibility for child benefit. This is particularly valuable at a time when many tax bands continue to be frozen – and will probably be until 2028.
“However, a lot of the opportunity is linked to allowances that refresh at the end of each tax year – meaning if you want to benefit this year, you need to act fast.
“Even after the introduction of IHT on unspent pension funds from April 2027 (unless left to a spouse or civil partner), pensions remain a fantastic tax planning tool.”
Aberdeen Adviser’s Andy Zanelli has developed a checklist of five things to consider to help savers use their pension to the maximum effect this year. Tax planning is complicated and personal, and an area where independent financial advice can be invaluable. This is not financial advice, but some of the issues to think about.
- Can you use your pension to offset ‘fiscal drag’?
“Income tax bands have been frozen since 2021, and are expected to remain so until 2028. More and more people could find themselves in a higher tax band as their income increases– a process known as ‘fiscal drag’.
“Pension contributions can help reduce this risk, as any pension contribution will extend your tax bands by the gross amount you put in. The amount you can save into a pension while still receiving tax relief – the ‘annual allowance’ – is capped at £60,000, up from a previous level of £40,000, giving a lot of headroom to use.
“The opportunity for this is even greater if you haven’t been saving lots into your pension recently, as you can carry forward unused allowances from previous years. Indeed, if you’ve recently stopped pension saving entirely, you may have up to £200,000 in headroom this year.
“For the same reasons, you can also potentially use pension contributions to avoid being hit by the ‘tapered’ annual allowance, and to reclaim your personal allowance – which is lost entirely if your adjusted income exceeds £125,140.”
- Can you ‘sacrifice’ your bonus into your pension?
“If you’re lucky enough to get a bonus, this is usually the time of year you receive it. Instead of taking it as cash, however, it might be in your best interest to ask your company to pay some or all of it into your pension, in exchange for an extra employer contribution.
“You get tax relief on the pension contribution at your marginal rate, and you might be able to negotiate a little extra given that your employer won’t need to pay National Insurance and so could pass the saving on. An important watch-out: bonuses in this tax year must be sacrificed before April to get the benefits outlined above.”
- Can your pension help you retain child benefit?
“The entitlement to a child benefit – which is assessed on the highest earner of a household – is reduced by 1% for every £200 of adjusted income above £60,000. It’s lost in full for those earning £80,000 or more.
“Although these thresholds have increased from 2023/24, higher-earning households may still be at risk of losing it, potentially forfeiting £2,212.60 per year for a typical family with two children.
“Making a pension contribution to reduce the ANI to the £60,000 threshold could offer an opportunity to claim this tax-free benefit, further improving the effective rate of tax relief on the contribution.”
- Should business owners take a dividend or make a pension contribution?
“If you’re a business owner, you might usually take a large chunk of your annual profit as a dividend. But it might be more advantageous to use some of your profits to make an employer pension contribution instead.
“Dividends are paid from profits after corporation tax. In contrast, a pension contribution will benefit from full corporation tax relief – up to 25% for those with profits over £250,000 paying the main rate of corporation tax – so every pound is going further.”
- Can you plan as a couple?
“Lots of people aren’t aware that they can top up their partner’s pension, up to the value of their partner’s earnings, and get tax relief at their partner’s marginal rate of tax.
“You should consider maximising tax relief at any higher rates for you both, before making any contributions that will only secure lower levels of relief.
“Of course, the opportunity to fund someone else’s pension doesn’t stop at spouses and partners – children and grandchildren could also be beneficiaries. Regular gifting in this way from surplus income could be very IHT effective as the gifts may be immediately outside the estate for IHT if the conditions for the exemption are met.”
