Pensions remain one of the most tax efficient ways to save for the future, and thoughtful planning around contributions continues to be one of the most effective tax planning tools available.

However, recent changes announced in the Autumn Budget, alongside upcoming reforms to the Inheritance Tax treatment of unused pension funds, highlight the importance of reviewing retirement planning sooner rather than later.

Below, we outline the key changes and what they may mean for individuals and business owners.

Salary sacrifice changes

From 6 April 2029, full tax-free salary sacrifice for pension contributions is due to be restricted. A new £2,000 limit will apply to the amount employees can contribute through salary sacrifice without incurring Income Tax and National Insurance contributions (NICs). This change will affect pension schemes operated by UK employers.

Around eight million employees currently use salary sacrifice to fund pension contributions, with over three million sacrificing more than £2,000 of salary or bonuses each year. For many, this change could significantly alter the tax efficiency of their retirement savings strategy.

Why the government is making changes

The government has stated that it continues to support and incentivise pension saving, retaining Income Tax and NICs reliefs on pension contributions worth more than £70 billion annually.

Most other salary sacrifice arrangements were closed in 2017. Pension salary sacrifice remained in place, but its cost has risen sharply. Forgone NICs increased from £2.8 billion in 2016/17 to £5.8 billion in 2023/24, and without intervention this figure was forecast to rise to almost £8 billion by 2030/31.

Pension contribution rules explained

Individuals receive tax relief on pension contributions at their marginal rate. Relief is available in each tax year on contributions up to the higher of:

• 100% of net relevant earnings
  
  
• £3,600 gross

However, there are limits on how much can be contributed tax efficiently.

The annual allowance caps the total amount of pension saving that can receive tax relief each year. For the 2025/26 tax year, the annual allowance remains at £60,000. Contributions above this level may trigger a tax charge.

Reduced allowance for higher earners

For higher earners, a tapered annual allowance may apply. This affects individuals with:

• Threshold income above £200,000
  
  
• Adjusted income above £260,000

Where adjusted income exceeds £260,000, the annual allowance is reduced by £1 for every £2 over this limit, down to a minimum of £10,000 once adjusted income reaches £360,000.

Using unused allowances from earlier years

Unused annual allowance can be carried forward for up to three tax years. This can be particularly helpful for individuals with fluctuating income, or owner-managed businesses where profits vary year to year.

For the 2025/26 tax year, unused allowances from 2022/23, 2023/24 and 2024/25 can be carried forward, provided the individual was a member of a registered pension scheme in those years. It is worth noting that the annual allowance for 2022/23 was £40,000, lower than the current limit.

Keeping track of pension savings

It is surprisingly common for people to lose track of their pension savings over time. Current estimates suggest there are around 3.3 million lost pension pots in the UK, holding a combined £31.1 billion. The average lost pot is largest among those aged 55 to 75, at approximately £13,500.

Many pension providers offer tracing and consolidation services, and the government’s Pension Tracing Service can also help individuals locate missing pensions. Looking ahead, the planned pensions dashboard aims to provide a secure, online view of all pension savings in one place. While there is no confirmed public launch date yet, it is expected to make managing pensions far simpler in future.

Talk to us

Pension rules can be complicated and changes often have a significant impact on your long-term tax position. Whether you are employed, self-employed or running your own business, getting the right advice can help ensure your pension strategy remains tax efficient.

If you would like to review your pension planning or understand how these changes may affect you, call us on 01904 787 973 or book a call with our team.