Pension savings in 2025/26 | Severn Accounting

Putting money into a registered pension scheme can be tax efficient. Individuals can make contributions in their own right, or even for someone else, and employers can make contributions on their employees’ behalf (and in some cases, these may be corporation tax deductible). With the new tax year approaching, now is an ideal time to consider your pension strategy for 2025/26 and maximise the tax relief available to you.

Understanding Tax Relief on Pension Contributions

One of the biggest advantages of saving into a registered pension scheme is the tax relief you receive. When you make a contribution, you can claim income tax relief at your marginal rate of taxation. For basic rate taxpayers, this effectively means the government tops up your contribution—if you pay in £80, you receive £20 tax relief automatically, making it £100 in your pension pot.

Higher rate taxpayers can claim an additional 20% relief through self-assessment, meaning a £80 contribution costs just £60 out of pocket. Additional rate taxpayers receive 45% relief overall. This makes pension contributions an excellent way to reduce your tax bill whilst building retirement savings.

For employed individuals, there’s another benefit: contributions made through payroll are made from gross salary, reducing your income tax and National Insurance. Self-employed individuals and company directors should ensure they’re claiming all available tax relief through their tax returns.

Annual Allowance and Lifetime Allowance Considerations

The annual allowance for 2025/26 remains at £60,000. This is the maximum amount you can contribute to a registered pension scheme in a single tax year whilst receiving full tax relief. If you exceed this threshold, you’ll face a tax charge on the excess.

However, there are some important exemptions and protections. If your income is above £260,000, the annual allowance tapers down—for every £2 of adjusted income above £260,000, your allowance reduces by £1, down to a minimum of £10,000. This is particularly relevant for higher earners and business owners.

It’s also worth noting that the Lifetime Allowance was abolished in April 2023, so there’s no overall cap on how much you can accumulate in pension savings over your lifetime. This has made pension planning significantly more flexible for many savers.

Employer Contributions and Employee Benefits

If you’re an employer, contributing to your employees’ pensions is a tax-efficient way to reward staff. Employer pension contributions are:

Corporation tax deductible for limited companies
Not subject to income tax or National Insurance in the employees’ hands
A powerful recruitment and retention tool

The National Minimum Wage and National Living Wage requirements don’t affect pension contributions, but workers must have access to a workplace pension if they meet eligibility criteria (aged 22 and above, earning over £10,500 per annum). Auto-enrolment duties apply unless your business is entirely exempt.

For directors and business owners, consider whether salary sacrifice arrangements or enhanced contributions could work for your business structure.

Making the Most of the Tax Year-End

As we move towards the end of the current tax year and into 2025/26, this is an opportune moment to review your pension strategy:

Check your contribution history – unused annual allowance doesn’t carry forward, except for the three preceding tax years in certain circumstances.
Plan for higher earners – if you’re approaching the taper threshold, forward planning can be beneficial.
Coordinate with your accountant – ensure pension contributions are properly recorded in your accounts and tax returns.
Consider spousal contributions – you can contribute to a spouse’s pension and claim tax relief, provided you’re a UK resident.

If you’re self-employed, you can contribute up to 100% of your net profit (subject to the annual allowance), making this an attractive tax planning tool. Limited company directors have similar flexibility through director contributions.

Looking Ahead

Pension planning shouldn’t be a once-yearly exercise. However, the tax year-end is a natural checkpoint to review whether you’re making the most of available tax relief and whether your pension arrangements align with your business and personal circumstances.

Tax reliefs are valuable, but only if you’re using them effectively. Whether you’re an individual saver, an employee, or a business owner, the flexibility within the pension system allows for tailored solutions.

For tailored advice, contact Severn Accounting — we’re here to help.