With UK taxes increasing in real terms, it’s worth seeking out ways to reduce your bill. Efficient planning isn’t just for the wealthy; it can benefit anyone who pays tax.
Contributing to tax-efficient investments, such as pensions and ISAs, offers a simple way to pay less tax over time. In fact, pensions are one of the most tax-efficient investments that you can make.
In this guide, we look at the main ways in which you can save tax using your pension.
Relief on Your Contributions
If you pay into your pension personally, you will automatically receive tax relief. If your pension uses relief at source, for every £80 you contribute, the provider normally claims £20 basic-rate tax relief from HMRC. There is no set limit on how much you can contribute to a pension, but tax relief on personal contributions is generally limited to the higher of £3,600 gross per year or 100% of your relevant UK earnings. Your pension savings are also subject to the annual allowance, which could result in a tax charge if exceeded.
If you are a higher or additional rate taxpayer, you can also claim back further tax relief through self-assessment. This means that a gross pension contribution of £1,000 will only cost you £600 (or £550 for additional rate taxpayers) from net income.
If you own a limited company, you can also make pension contributions through the business. Pension contributions are normally an allowable business expense when incurred wholly and exclusively for the purposes of the trade, and can reduce your corporation tax bill.
For most people, the standard annual allowance is £60,000, although pension saving above your available allowance may result in a tax charge.
Contributing Through Your Employer
Opting into a workplace pension can be an excellent way of boosting your retirement benefits. Some employers even match an employee’s contributions up to a certain limit.
When contributions are deducted through salary sacrifice, you only pay tax on your earnings minus the contributions. This simplifies matters, especially if you are a higher or additional rate taxpayer, as you don’t need to claim back tax relief.
As salary sacrifice effectively reduces your income, you and your employer can also save on National Insurance. Provided your earnings remain at or above the Lower Earnings Limit (£6,708 for the 2026/27 tax year), you can generally continue to build qualifying National Insurance credits towards the State Pension. However, salary sacrifice can affect entitlement to certain state benefits and statutory payments.
Increasing your contributions can be a good idea, but you need to make sure that your reduced earnings remain above minimum wage.
Tax-Efficient Investments
Another advantage of pensions over other investments is that you don’t pay tax on your investment funds.
When you invest, your assets will generate interest and/or dividends. When this income accumulates in a pension, it is not taxable.
Pension investments are also free of capital gains tax, which means you can switch your funds or change pension providers without worrying about CGT.
What Happens When You Take Benefits?
In most cases, you can take up to 25% of your pension as a tax-free lump sum. This is normally subject to the Lump Sum Allowance of £268,275, although some people may have a protected right to take a higher amount tax free.
It may suit you to withdraw the full lump sum, as this can help to clear a mortgage, make gifts to family, take the holiday of a lifetime, or make home improvements before settling into retirement.
Alternatively, you can take the tax-free cash over time to supplement your income. Assuming the fund continues to grow, this can actually increase the amount of tax-free cash you receive.
The remaining 75% of your pot will be taxed at your normal rate as and when you withdraw it. Because pensions are flexible, you can control how much you take depending on your tax position. For example, you might take more in the early years and reduce it when your State Pension starts. It could be efficient to withdraw pension income up to your personal allowance (currently £12,570 per year) and supplement it with cash and investments.
Passing on Your Pension
If you have other significant assets or sources of income, it may be worth considering leaving your pension invested for longer, as this could offer greater tax efficiency. Your pot will continue to benefit from tax-free growth and your income tax liability won’t increase.
If you die before age 75, you can pass on your pension to your loved ones free of income tax. If you die after age 75, they will pay tax at their own marginal rate if they take withdrawals.
Please note that, for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will form part of the estate for IHT purposes.
Tax Traps to Be Aware of
Pensions are an excellent way to save on tax, but there are a few potential pitfalls that could actually cost you more:
- You will only receive tax relief on contributions within your relevant UK earnings or £3,600 if higher.
- If you exceed the annual allowance, you will pay tax on the excess.
- While this simply restores your tax position to what you would have paid anyway had you not contributed, the money is now locked in your pension, and could be taxed a second time when you take benefits.
- Anyone earning over £200,000 in “threshold income” – and adjusted income exceeds £260,000 – has a reduced annual allowance. This is tapered away at a rate of £1 for every £2 earned over the threshold. The minimum tapered annual allowance is now £10,000.
- If you flexibly access taxable benefits from a defined contribution pension, you may trigger the Money Purchase Annual Allowance (MPAA), which limits future tax-relieved contributions to defined contribution pensions to £10,000 per tax year. You cannot use unused annual allowance from previous tax years to increase the MPAA.
Pensions offer an excellent way of saving tax, whether this is through a workplace scheme or personal plan. If you are a higher earner, own your own business, or are thinking of taking benefits, you may want to seek advice on the best way to maximise the tax benefits.
Please don’t hesitate to contact a member of the team to find out more about retirement and tax planning.
The content in this article was correct on 02/10/2026.
The value of your investment can go down as well as up and you may get back less than the amount invested
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age).
The Financial Conduct Authority does not regulate Trusts, Wills, Tax and Estate Planning
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