Seven tips to boost your pension and cut your tax bill

Paying into a pension – month in and month out – throughout your working life is usually the best way to save for retirement.

Tax relief tops up your contributions and, if it’s a workplace pension, your employer will pay in too.

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But, if you really want to maximise the value of your pension, here’s how to level it up with tips to boost your savings and cut your tax bill.

1) Don’t assume you’re automatically getting the right level of tax relief

Personal pensions you’ve arranged yourself – like self-invested personal pensions (SIPP) – work on a “relief at source” basis. This means that they can only claim basic rate (20%) tax relief automatically. So, if you pay higher or additional rate tax you’ll need to be proactive and claim the outstanding 20% or 25% you’re entitled to yourself.

You need to do this through your tax return if you complete one. Otherwise you can use HMRC’s online claims service.

The money won’t automatically be paid into your pension though. You can take it as a rebate to spend as you wish or use it to reduce your income tax bill.

According to a freedom of information request from pension consultancy LCP, some 800,000 taxpayers a year miss out on more than £1 billion in pensions tax relief.

Most workplace pensions work on a net pay basis, so you get the full rate of tax relief you’re entitled to straightaway, but if you’re not sure how yours works, it’s important to check with HR.

2) Pay bonuses into your pension

If you’re lucky enough to get bonuses at work, there’s a good chance you’re mentally spending the cash months before it actually lands. But however much fun you can have with it, the benefits of asking your employer to pay it into your pension are hard to ignore.

So-called bonus sacrifice means you’ll get the full value of your bonus stashed away for retirement, without paying a penny in tax or national insurance (NI). For a higher-rate taxpayer getting a £10,000 bonus, it’s the difference between £5,800 (40% tax plus 2% NI) in your bank account or £10,000 in your pension. Most employers don’t require you to commit the full bonus amount. It’s possible to direct some towards your future, while keeping the rest back for today.

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Just note that from April 2029 you’ll only be able to make NI savings on pension contributions worth up to £2,000 a year (income tax relief won’t be affected).

3) Increase pension contributions to fend off a tax hike

If you earn over £100,000, you might be familiar with the 60% tax trap. This is where higher-rate taxpayers start paying tax at an effective rate of 60% on income between £100,000 and £125,140 (62% if you include 2% NI) – thanks to the gradual removal of the personal allowance at a rate of £1 for every £2 over £100,000.

Reaching the six-figure milestone is even more costly for parents of young children. That’s because they’ll also lose entitlement to additional free childcare and the tax-free childcare scheme.

However, by increasing your pension contributions it may be possible to get around these challenges.

HMRC doesn’t look at your headline salary, instead it will use your adjusted net income which is based on your earnings after pension contributions have been made. As such, by increasing payments into your pension, you don’t just feather your retirement nest, you also get to keep your adjusted net income below the crucial threshold.

This hack doesn’t just help higher earners. You could also use the same approach to prevent you becoming a higher-rate taxpayer (when your earnings exceed £50,270) or to protect child benefit payments. Currently, payments start being repaid through the high-income child benefit charge if one partner earns more than £60,000 a year and is fully clawed back once earnings reach £80,000.

4) Use carry forward – if you can

The standard annual allowance for pensions is 100% of your earnings, up to £60,000.

But if you’re able to pay more, carry forward lets you pay in any of your unused allowance from the last three tax years. You just need to ensure the total contribution for the year doesn’t exceed your earnings and that you were in a pension for the year you are carrying forward.

These rules mean that, in the current tax year, you could pay in as much £240,000 and get tax relief, (so long as you hadn’t made any pension contributions in the previous three years and you’ve earned at least that this year).

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Carry forward can be particularly helpful if you’re self-employed and have a bumper year, or you have a windfall you can pay into your pension like an inheritance.

Just be aware that if you’re a really high earner (with adjusted net income over £260,000 a year) you may be affected by the taper allowance. This reduces the amount you can pay into pensions by £1 for every £2 you earn over the threshold. It bottoms out when adjusted earnings reach £360,000, leaving you with an annual allowance of £10,000.

5) Understand the impact of early access

You can take cash out of your pension at any age from 55 (57 from 2028), but it’s important to think twice about accessing your retirement savings before you finish work. If you make a withdrawal before you go into drawdown, or buy an annuity, 25% will usually be paid tax-free but the remainder will be taxed as income (when you “crystallise” your pension you can take 25% as a tax-free lump sum).

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But a hefty tax bill isn’t the only problem. Nor is the fact that you’ll be reducing the value of your pension before you retire. A catch that frequently flies under the radar is that a taxable withdrawal will trigger the money purchase annual allowance (MPAA). This will see the maximum contribution you can make into your pension in future years drop from £60,000 to £10,000. That’s an important point to consider if you might have a windfall in your final years of work.

6) Combine old workplace pensions into one pot

If you’ve got a handful of workplace pensions that you’re no longer contributing to, it’s hard to keep track of your total retirement savings.

But combining several into one makes them easier to manage and – if your new pension has lower charges – means you’ll get to keep more of your investment returns.

A personal pension like a SIPP can work well, providing one pot to move pensions into each time you change jobs. This means you’ll have just two pots to monitor: your current workplace pension and your SIPP.

Before you transfer any pensions you just need to be careful that you don’t lose any valuable benefits like guaranteed annuity rates or a protected tax-free lump sum.

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Also note that the situation is different if you have any defined benefit (DB) pensions. Most public sector pensions (like NHS, teachers and Armed Forces schemes) can’t be transferred.

Private sector schemes can be cashed in and transferred into a defined contribution (DC) pot – such as a SIPP – but it’s regarded as high risk as it involves exchanging guaranteed income for cash that you’ll need to manage. As such, if your pension is worth more than £30,000, you’ll need to take advice.

7) Tune into your investments

Your workplace pensions will likely be invested in a default fund – these may be relatively cautious in approach with risk tailing off as retirement draws closer.

This isn’t necessarily a bad thing – especially if you don’t want to make investment decisions yourself.

But, if you plan to keep your pension invested throughout retirement (ie you don’t want an annuity), it might not deliver the growth you need.

By taking more interest in your investments, you may be able to make your savings work harder and in a way that suits your retirement plans.

Choice will be more limited with workplace pensions, but if you’ve got a SIPP you’ll have access to a wide range of investments. A good platform will also give you access to the tools and research you need to make more informed investment decisions.