Can a Pension Help Save on Tax Right Now?

It’s easy to put off pension planning, especially when retirement feels a long way off. However, the longer it’s delayed, the harder it becomes to retire on your terms. Over recent decades, there has been a significant shift in the way many people save: the days of guaranteed final salary pensions are essentially behind us. The responsibility now falls squarely on individuals to build their retirement funds. 

According to the Pensions and Lifetime Savings Association (PLSA), a single person now requires around £23,300 per year for a moderate retirement lifestyle — and this figure is expected to rise with inflation. Yet, research from Scottish Widows reveals that nearly 45% of people in their 40s are not on track to meet their retirement goals, with many facing what is known as a “pension black hole.” 

While that may sound worrying, the good news is that pensions don’t just help in the long run — they also offer immediate tax advantages. Contributions benefit from tax relief at your marginal rate, and they can help offset frozen allowances, reduce exposure to higher tax bands, and ultimately lower your tax bill today. 

In this blog, we explore how pensions can be one of the most effective — and underused — ways to reduce your tax liability right now, while still building a secure financial future. 

How Pension Contributions Reduce Tax Today 

Income Tax Relief 

Pension contributions attract immediate tax relief. For basic-rate taxpayers, this means a £1,000 contribution only costs £800 — the government tops up the remaining £ 200. 
For higher and additional-rate taxpayers, you can claim further relief via your self-assessment tax return: 

  • 40% taxpayers: net cost can be as low as £600 

  • 45% taxpayers: as low as £550 

This makes pension saving one of the most efficient ways to reduce your taxable income. 

Fight Back Against Frozen Allowances 

Several tax thresholds and allowances have been frozen or reduced, quietly increasing tax bills for many: 

  • Personal Allowance: Frozen at £12,570 until April 2028 

  • Higher-Rate Threshold: Frozen at £50,270 

  • Additional-Rate Threshold: Lowered from £150,000 to £125,140 in 2023 

  • Loss of Personal Allowance: Gradually removed for those earning over £100,000 

  • High Income Child Benefit Charge (HICBC): Taper now starts at £60,000 and ends at £80,000 (as of April 2024), with plans to base this on household income from 2026  

Pension contributions can help reduce your adjusted net income, allowing you to: 

  • Retain more of your Personal Allowance 

  • Reduce or eliminate the Child Benefit charge 

  • Avoid tipping into a higher or additional rate tax band 

Salary Sacrifice – A Powerful Tool for Employees 

Salary sacrifice is a smart way to reduce your tax and National Insurance (NI) contributions and increase your pension contributions. 

How It Works: 

You agree to reduce your gross salary by a chosen amount. Your employer then contributes that amount directly into your pension. 

Example: 

You earn £50,000 and want to contribute £5,000 into your pension. 

  • Without salary sacrifice: 
    You take your full salary and contribute personally. The net cost is £4,000 (after 20% relief) — or less if you're a higher-rate taxpayer (via tax return). 

  • With salary sacrifice: 
    Your salary drops to £45,000 and your employer pays £5,000 into your pension. 

    You save:  

  • Income tax (20% or 40%) 

  • Employee NICs (12% below ~£50k, 2% above) 

  • Your employer saves 13.8% NICs, and may pass some of that to your pension 

Key Benefits: 

  • Increased pension contributions at a lower personal cost 

  • Reduces adjusted net income 

  • Helps reclaim lost allowances (e.g. Child Benefit or Personal Allowance) 

  • Can be structured as regular or one-off payments

Considerations: 

  • May affect borrowing (e.g. mortgages) and certain benefits 

  • Must not reduce salary below the National Minimum Wage 

  • Requires a written agreement with your employer 

Company Contributions 

If you’re a company director, employer pension contributions can be made directly from your limited company. 

Advantages: 

  • Contributions are corporation tax-deductible (up to 25%) 

  • No National Insurance due (unlike salary or bonuses) 

  • Count toward your annual allowance (currently £60,000) 

It’s a legitimate and highly tax-efficient way to extract profits from your business. 

Using Carry Forward to Maximise the Benefit 

If your income is irregular or you’ve had a recent windfall, the carry-forward rules allow you to exceed the current annual allowance: 

  • Current annual allowance is £60,000 (2025/26) 

  • You can carry forward unused allowance from the previous three tax years 

  • Ideal for: 

  • Reducing a one-off large tax bill 

  • Topping up missed contributions 

  • Maximising pension funding while still eligible for tax relief 

What to Watch Out For 

Pension rules can be complex, and it’s important to avoid common pitfalls.  

Key Limits and Traps: 

  • Money Purchase Annual Allowance (MPAA): 
    If you’ve started accessing pension income flexibly, your allowance may be restricted to £10,000. 

  • Tax Relief Limits: 
    You only receive relief on contributions up to the greater of: 

  • 100% of your UK taxable earnings 

  • Or £3,600 

  • Tapered Annual Allowance: 
    Affects high earners (adjusted income over £260,000). Your allowance may be reduced to as low as £10,000. 

We work closely with your accountant to check these rules and ensure you're contributing at the optimal level for your situation. 

How Ifamax Can Help 

At Ifamax, we create tailored retirement and tax planning strategies for individuals, business owners, and company directors. We work collaboratively with your accountant to ensure your pension planning aligns seamlessly with your broader financial picture. 

What Makes Us Different: 

  • Clear, evidence-based advice with a long-term focus 

  • Expertise in both personal and business tax planning 

  • Chartered Financial Planners with a client-first approach 

Financial planning isn’t just about investment returns — it’s about maximising every available tax benefit, so you keep more of what you earn. 

Reduce Tax Today, Build for Tomorrow 

You don’t have to wait until retirement to benefit from your pension. With the right planning, it’s one of the few remaining ways to legitimately and efficiently reduce your tax bill today, while also preparing for a more secure future. 

Contact us for a free Discovery Meeting. 

Let’s explore how you can use pensions to take control of your tax, your income, and your retirement goals — starting now. 

 

Risk warning  

 

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. References to specific products are made solely to illustrate educational points and do not constitute any form of recommendation or advice. Information contained herein has been obtained from sources believed to be reliable, but it is not guaranteed.  

 

Ashton Chritchlow