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What the New Tax Year Means for Your Pension Contributions

As the new tax year approaches on 6th April 2025, it’s essential to understand how changes to tax thresholds and pension allowances may impact your retirement planning. By staying informed, you can make strategic decisions to maximise your pension contributions and enhance your financial wellbeing. 

Annual Allowance Adjustments 

The Annual Allowance is the maximum amount you can contribute to your pension each tax year while still receiving tax relief. For the 2025/2026 tax year, this allowance remains at £60,000. However, if your annual income is below £60,000, your personal limit is 100% of your UK earnings. For those with no earnings, the maximum contribution eligible for tax relieve is £3,600. 

Tapered Annual Allowance for High Earners 

High earners need to be aware of the Tapered Annual Allowance. If your adjusted income exceeds £260,000 your Annual Allowance decreases by £1 for every £2 over this threshold, with a minimum allowance of £10,000. This means that individuals with an adjusted income of £260,000 or more will have their Annual Allowance reduced to £10,000

Income Tax Thresholds and Implications 

The Personal Allowance – the amount you can earn before paying income tax – remains at £12,570 for the 2025/2026 tax year. The Basic Rate of 20% applies to income between £12,571 and £50,270. The higher rate of 40% applies to income between £50,271 and £125,140 and the Additional Rate of 45% applies to income over £125,140.

It’s important to note that the freezing of these thresholds, coupled with inflation and wage growth, may result in more individuals being pushed into higher tax brackets – a phenomenon known as ‘fiscal drag’. This could increase your tax liability over time, making efficient pension planning even more critical. 

Maximising Pension Contributions 

To make the most of your pension contributions, in light of these thresholds: 

Utilise Salary Sacrifice Schemes: By agreeing to exchange part of your salary for pension contributions, you can reduce your taxable income, potentially keeping you within a lower tax bracket and increasing your take-home pay. It’s important to note that having a lower salary may impact the amount a consumer you are able to borrow and can affect some state benefits.  

Carry Forward Unused Allowances: If you haven’t used your full Annual Allowance in the previous three tax years, you may be able to carry forward unused amounts to the current tax year, allowing for larger contributions without incurring tax charges. 

Monitor Income Levels: Be mindful of income thresholds that trigger higher tax rates or reduce allowances. For instance, exceeding the £100,000 income level can affect your Personal Allowance, while surpassing £260,000 impacts your Annual Allowance due to tapering. Strategic pension contributions can help manage your taxable income and maintain valuable allowances. 

State Pension Considerations 

The State Pension could increase by 5.5% in April 2026, raising the annual amount to £12,631. This increase, combined with the frozen Personal Allowance, means that individuals relying solely on the full new State Pension may, for the first time, have a portion of their pension income subject to income tax.

Navigating the nuances of pension contributions and tax thresholds is vital for effective retirement planning. By understanding the changes in the 2025/2026 tax year and implementing strategies to maximise your pension savings, you can work towards a more secure financial future. Speaking with a financial adviser, like us, can provide personalised guidance tailored to your individual circumstances. 

*Please note: The Financial Conduct Authority does not regulate tax planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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