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Maximising Your Pension: Tax Planning for Retirement

20th June 2025

When it comes to retirement in the UK, strategic tax planning is crucial for ensuring a financially secure future.

Whether you’re approaching retirement or just starting your career, it’s important to maximise your pension savings, be aware of pension tax-free allowances and understand how to access pension savings tax efficiently. Then you will feel confident that you’ll be able to have a comfortable retirement.

In this article, we’ll break down the key elements of retirement tax planning, from contributions and withdrawals to the changes around the lifetime allowance, helping you make more informed decisions and take full advantage of tax relief opportunities.

 

Pension Contributions and Tax Relief

Pension contributions come with tax relief, which helps your pension savings grow faster by topping up your contributions with money reclaimed from HMRC, which can significantly boost your pension income for retirement.

This government incentive encourages pension savings for retirement and works through pension providers, claiming back the tax paid and adding it directly to your pension pot.

Taking advantage of this tax relief can be vital to your retirement savings, as more contributions lead to increased government support – so, it is important to understand what’s involved.

 

How to get tax relief on pension contributions?

When it comes to obtaining tax relief on pension contributions, there are two options:

Relief at source – If you have a personal pension, you will automatically get tax relief through relief at source.

Your employer will deduct your pension contributions from your pay after tax reductions have been made and then send them to your pension provider. Your provider will then claim the 20% tax relief from HMRC before they place it in your pension pot.

Higher or additional rate taxpayers receive additional relief, which we will discuss in more detail below, and will need to claim this from HMRC.

Additionally, self-employed individuals will need to make direct contributions to their pension provider.

Net pay – With the net pay option, contributions are deducted after National Insurance is calculated, but before income tax is deducted, reducing your overall tax payments. This relief takes effect immediately and is provided without the need to claim it back.

Salary sacrifice – With the salary sacrifice option, you give up a portion of your salary in exchange for your employer making larger pension contributions. Since your salary is lower, you will save on income tax and National Insurance.  This relief takes effect immediately and is provided without the need to claim it back.

Unfortunately, if you don’t have any tax liability, no relief will be received through net pay or salary sacrifice. In this case, you will have to use relief at source to benefit from any tax relief on your pension contributions.

 

How is this tax relief calculated?

Tax relief will be received at the highest rate of income tax you pay, and will vary depending on if you’re a basic, higher, or additional rate taxpayer:

Basic rate taxpayers – If you’re a basic rate taxpayer, you will receive 20% tax relief. This means that every £1 you pay in becomes £1.25, effectively boosting your contribution by 25%.

Higher rate taxpayers – However, if you’re a higher rate taxpayer, you will receive 40% tax relief. This means that every £1 you pay in becomes approximately £1.66, boosting your contribution by 66%.

Additional rate taxpayers – Finally, if you’re an additional rate taxpayer, you will receive an additional 25% tax relief (on top of the 20% received at source). This effectively boosts your contribution by 80%.

If you’re a higher or additional rate taxpayer, to receive the additional tax relief on your pension contributions, you will need to claim any relief in addition to the basic 20% tax relief back from HMRC.

You can still receive tax relief on pension contributions even if you’re unemployed or earning less than £3,600 a year. In this case, you’re allowed to contribute up to £2,880 annually to a pension, and HMRC will add 20% tax relief, boosting the total contribution to £3,600. While you can contribute more than this amount, any excess won’t qualify for tax relief.

 

Does this tax relief help to reduce income tax?

Pension contributions are exempt from income tax, however, contributing from earnings doesn’t directly lower your taxable income. However, you could benefit from a salary sacrifice scheme.

Effectively, this will reduce your taxable income, as employers will make extra pension contributions in exchange for a salary decrease.

 

What is the contribution allowance?

You can receive tax relief on up to 100% of annual earnings (up to the £60,000 annual contributions allowance), although this is subject to individual limits, excluding employer contributions.

However, exceeding these limits may lead to additional charges. Therefore, seeking advice from a professional can help ensure you are aware of the latest regulations and contribution limits, helping to avoid incurring any further tax charges.

 

Pension Withdrawals

You can start drawing on most personal pensions at the age of 55 (57 from April 2028), although your pension provider determines when you can start withdrawing money from your pension. However, pension withdrawals can have tax implications.

When you make a withdrawal, your pension provider will deduct any applicable taxes before releasing your funds. If you make a large withdrawal, you may incur a higher tax rate, and additional taxes could apply at the tax year end.

There are several ways to withdraw your pension:

Lump sum withdrawals

You can withdraw up to 25% of your pension value as a tax-free lump sum. The remaining 75% is subject to income tax at your marginal rate.

As of 6 April 2024, the Lifetime Allowance (LTA) has been abolished. However, a new limit has been introduced: the Lump Sum Allowance (LSA), currently set at £268,275, which is the maximum amount you can take tax-free across all pensions (unless you have valid LTA protection).

After taking the tax-free lump sum, the remaining amount can be accessed via annuity purchase, flexi-access drawdown, or direct cash withdrawal, depending on your provider.

 

Annuity purchase

An additional option is purchasing an annuity from an insurance company, ensuring regular payments for life. The payment amount is influenced by factors such as age, gender, pension pot size, interest rates, and health. 

 

Drawdown funds

There are two types of drawdown funds to manage your pension, such as a flexi-access drawdown fund, which provides diverse options such as withdrawals, short-term annuities, and contributions (taxed over the money purchase annual allowance).

However, once you start taking income, the money purchase annual allowance (MPAA) drops to £10,000.

Alternatively, if you possess a ‘capped drawdown’ fund, your money remains invested, allowing withdrawals within predetermined limits. These limits undergo regular reviews until you reach the age of 75 and are reviewed annually thereafter.

 

Direct cash withdrawal

You may also choose to take Uncrystallised Funds Pension Lump Sums (UFPLS) – smaller cash sums taken directly from your pension pot. With each UFPLS, 25% is tax-free, and 75% is taxed as income.

You cannot take smaller cash sums if you’ve reached your lifetime allowance, have certain types of lifetime allowance protection, or if you’re under 75 and the desired withdrawal exceeds the remaining lifetime allowance.

 

Lifetime Allowance

 From 6 April 2024, the Lifetime Allowance (LTA) was abolished and replaced by two new limits: the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).

The LSA caps the total amount an individual can receive as tax-free lump sums during their lifetime, currently set at £268,275 for most people. The LSDBA, set at £1,073,100, applies to tax-free lump sums paid on death before age 75.

Any payments above these thresholds will be taxed at the individual’s marginal rate of Income Tax.

 

Maximising tax-efficient retirement income with Edwards Accountants

Building tax-efficient pension savings and retirement income is the foundation of a financially successful retirement plan. At Edwards Accountants, our experienced accountants can help you navigate the complexities of retirement tax planning and personal tax planning.

We work closely with you to offer practical tips and strategies for maximising tax efficiency in retirement based on your personal circumstances. We achieve this by assessing the tax benefits of various options, utilising tax allowances, advising on accessing tax-free cash, inheritance tax planning, staying up to date with current tax rules, minimising tax burdens, and helping you understand which benefits are taxable.