Indeed, any investment returns generated within your fund are typically free from Income Tax and Capital Gains Tax.

Better yet, you can also receive tax relief on your contributions, significantly bolstering the value of your pot over time.

Despite these advantages, many people overlook one of the most valuable benefits pensions offer.

Research from PensionsAge (8 December 2025) found that 44% of UK adults don’t know what pension tax relief is, while just 31% could identify its purpose.

Over time, missing out on pension tax relief could be costly. So, continue reading to find out how pension tax relief works and how it could significantly improve your retirement income.

Pension tax relief is when the government tops up your contributions

When you pay into a pension, the government essentially “tops up” these contributions based on your marginal rate of Income Tax. Looking at it another way, tax relief acts as a “refund” of the Income Tax you have already paid on the money you put in your pot.

As a result, in England, Wales, and Northern Ireland, a £100 payment into your pension would typically cost:

• £80 if you pay basic-rate Income Tax
• £60 if you pay higher-rate Income Tax
• £55 if you pay additional-rate Income Tax.

Please note, Income Tax bands and rates are different in Scotland, which affects pension tax relief.

For most personal pensions, basic-rate tax relief is applied automatically using a system known as “relief at source”. Some schemes use net pay arrangements, where tax relief is applied differently (this article talks about relief at source only).

If you pay higher- or additional-rate tax, you’re usually entitled to relief at your marginal rate. However, this portion isn’t added automatically. Instead, you usually need to claim it through your self-assessment tax return or by directly contacting HMRC.

Many people forget to do this. Standard Life (24 February 2025) estimates that up to £1.3 billion of extra relief went unclaimed between the 2016/17 and 2020/21 tax years.

This can make a considerable difference:

• A £1,250 total pension contribution would cost a basic-rate taxpayer £1,000, as £250 is added by HMRC.
• For a higher-rate taxpayer, the same total contribution would only cost £750 once the extra relief is claimed.

As such, ensuring you claim everything you are entitled to could substantially increase the amount of money you can put towards retirement.

If you believe you have missed out in the past, it’s worth noting that it is possible to backdate your tax relief claims for up to four tax years.

There are limits to the amount you can tax-efficiently contribute to your pension

While the incentives of tax relief are generous, there are limits on how much you can pay into your pension each year tax-efficiently.

You can receive tax relief on any pension contributions worth up to 100% of your earnings for that tax year. But if you surpass the Annual Allowance, your contributions could face a tax charge.

The Annual Allowance sets the maximum amount that can be contributed across all your pensions in a single tax year without incurring a tax charge.

As of 2025/26, this is £60,000. While the Annual Allowance does reset each year, you may be able to carry forward unused allowances from the previous three tax years, provided you were still a member of a pension at the time. You also need to use all of the current year’s allowance before you can carry forward.

It’s vital to note that if you have a high income, you may face the Tapered Annual Allowance.

In 2025/26, this means that when your income exceeds £200,000, and your adjusted income (which includes your pension contributions) is above £260,000, the Annual Allowance falls by £1 for every £2 earned above that level. Just remember that the minimum it can fall to is £10,000.

What’s more, if you’ve already started accessing your pension wealth, you may have triggered the Money Purchase Annual Allowance.

This typically reduces the amount you can tax-efficiently contribute to your pension to £10,000 each year.

Compounding returns over time can make pension tax relief even more attractive

One of the most practical aspects of tax relief is that it’s added straight to your pension, where it is usually invested on your behalf by your provider.

Any growth is reinvested, allowing your savings to benefit from “compounding”. This is the “growth on growth” effect that further boosts your returns over a longer period of time.

Standard Life (21 August 2025) gives an example of how beneficial this can be.

If you contributed £200 to your pension each month from age 25 to 65, and your investments grew at an average rate of 5% each year, your pot could be worth around:

• £29,400 after 10 years
• £73,000 after 20 years
• £232,000 after 40 years.

While you might imagine that your pot would grow from £73,000 after 20 years to £146,000 after 40 years, it would actually increase in value significantly more. This is thanks to compounding returns and long-term growth.

As such, making regular payments, starting early, and making full use of tax relief can all improve your financial security later in life.

Get in touch 

We can help ensure you’re claiming all the pension tax relief you’re entitled to, helping you secure peace of mind for your retirement. Please get in touch to arrange a meeting.

We provide a free one-hour consultation with an independent financial planner. Its a great opportunity for you to have a personal conversation. You may come away with a clearer understanding of how much you should contribute to your pension to achieve the retirement you want.

Call our team: 01244 347 583 |  info@innesreid.co.uk | Send a message

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More on tax and pensions

Guide download – Everything you need to know about the State Pension

How much should you contribute to your pension?

Is the default pension fund right for you?

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

The Financial Conduct Authority does not regulate tax planning.

The post How pension tax relief could boost your retirement income appeared first on Innes Reid.

> Link to Pension Glossary part one

Pension transfer

You can transfer your pension fund to a new pension arrangement to get cash from it if you’re 55 or over. If you have a Defined Benefit pension, you have limited options to access your money compared to a Defined Contribution pension. You can transfer a DB to a DC pension, but this is usually not recommended as you may lose value. It is a legal requirement to seek financial advice if your pension has a transfer value of £30,000 or over.

If you decide to transfer out of your workplace defined benefit pension scheme, the trustees who run the scheme convert the benefits you’ve built up into a cash sum. This is called a ‘transfer value’, also known as a ‘cash-equivalent transfer value’ or ‘CETV’.

You must then invest this in a:

• Personal or stakeholder pension
• Pension scheme with another employer
• Self-invested personal pension (SIPP)

Not all employer pension schemes, personal pensions or SIPPs accept transfers, so do check first.

Pensionable earnings

Employers make contributions to an employee’s pension fund based on a percentage of the employee’s earnings. The amount of pay that pension contributions are calculated on is called pensionable earnings.

Depending on the scheme, your pensionable earnings are either your salary at retirement, or your average salary over the period of your membership in the scheme.

Pensionable service

Your pensionable service is the time that you have been in your employer’s pension scheme. It is a factor in calculating your Defined Benefit pension. It isn’t necessarily the same as your length of service in the company.

SIPP

SIPP stands for Self-Invested Personal Pension. It is a Defined Contribution pension ‘wrapper’ which enables you to choose from a range of investment options and manage them yourself, or pay an authorised investment manager to make the decisions for you. SIPPs tend to be more suitable for large funds and for people who are experienced in investing as the risks are generally higher, but they do have the potential for greater growth.

Stakeholder pension

Stakeholder pension schemes are a type of Defined Contribution pension scheme. They are a flexible way to build up retirement income benefits, while benefiting from tax advantages, whether you’re employed, self-employed or not working. They are designed to be accessible to all, and have limits on the charges that can be imposed.

State pension

The state pension is a guaranteed pension provided by the government. You can claim state pension when you reach the state pension age. For men and women, this is currently 65, increasing to 66 by October 2020. The current state pension pays just £175.20 per week, which isn’t enough for most people to live on. At Innes Reid, we suggest that you start saving for your retirement as soon as possible and save as much as you can afford, rather than rely on the state pension alone. You should review your investments at every stage of your working life.

Tax relief

Tax relief is when you can get tax back or have it paid in another way. With a personal pension, the government pays back the money you would have paid on it in income tax. This sets pensions apart from other investments. For example, if you pay income tax at 20%, a contribution of £80 into your pension will turn instantly into £100, because that 20% tax has been added back on. Higher and additional-rate taxpayers are currently able to claim 40% and 45% tax relief.

Unfunded scheme

An unfunded scheme is an employer-managed Defined Benefit pension plan that is generally for public sector employees. It uses the employer’s current income to fund pension payments at the time they are due, rather than building an investment fund in advance. You can’t transfer out of an unfunded scheme, but as it has guaranteed benefits, most people shouldn’t want to leave it.

> Link to Pension Glossary part one

As Chartered Financial Planners, Innes Reid financial advisers hold the G60 advanced pension qualification and are registered as an approved pension transfer specialist with the FCA, which means we can offer you the very best retirement planning service, carefully reviewing all aspects of your personal or company pension plans.

Contact us on tel: 01244 347583 or email: info@innesreid.co.uk for bespoke and independent financial advice on your pension options and retirement plans. We are available at times to suit you.

The post Pension Glossary – learn the lingo (part two) appeared first on Innes Reid.

Pensions remain the most tax efficient way to save for your retirement. Here is a list of 10 reasons why we think you should pay into your pension before April!

1. Tax relief at the highest rates

• Tax relief at the highest rates may not be around forever.
• Additional and higher rate taxpayers should contribute to maximise tax relief at 45%, 40% or even 60% while they have the opportunity.
• Carry forward can allow contributions in excess of the current annual allowance.

2. Avoid the annual allowance cut for higher earners by using carry forward

• High earners face a cut in the amount of tax-efficient pension saving they can enjoy this tax year. The standard £40,000 annual allowance could drop to £10,000.
• It is possible to reinstate their full £40,000 allowance by making use of carry forward.

3. Last chance for a £50k carry forward

• This tax year is the last opportunity to carry forward unused annual allowance from 2013/14 when it was still £50,000. If it isn’t used, the additional allowance will be lost.
• The maximum carry forward of unused allowances for the current year is £130,000.

4. Boost SIPP funds now before accessing flexibility

• Anyone looking to take advantage of the new income flexibility for the first time should consider boosting their pension fund before April, potentially sweeping up the full £40,000 from this year plus any unused allowance carried forward from the last three years.
• Once pensions are accessed, the Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding will be restricted. The MPAA is currently £10k but is set to fall to £4k a year in April – with no carry forward.

5. Recover personal allowances

• Pension contributions reduce an individual’s taxable income.
• For a higher rate taxpayer ,with taxable income of between £100,000 and £122,000, a personal contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%.
• For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.

6. Avoid the child benefit tax charge

• A pension contribution can preserve the value of child benefit, rather than being lost to the child benefit tax charge.
• The child benefit, worth over £2,500 to a family with three children, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. A pension contribution reduces ‘income’ for this purpose, the tax charge can be avoided.
• The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved, can lead to effective rates of tax relief as high as 65% for a family with three children.

 7. Sacrifice bonus for an employer pension contribution

• Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
• The employer and employee NI savings could also boost pension funding.

8. Providing for loved ones

• The new death benefit rules make pensions extremely tax efficient for passing on wealth to family members – typically no IHT payable and free of tax for deaths before age 75.
• You may want to consider moving savings which would otherwise be subject to IHT into your pension to shelter them from IHT and benefit from tax free investment returns.

9. Dividend changes and business owners 

• Directors of small and medium sized companies could be facing an increased tax bill following changes to the taxation of dividends.
• A pension contribution could be the best way of cutting their overall tax bill.
• If the director is over 55 they now have full unrestricted access to their pension savings.
• There’s no NI on an employer pension contributions and they are an allowable deduction against corporation tax.
• By making an employer pension contribution, this ensures that the tax that would have otherwise gone to HMRC boosts the director’s retirement savings.

 10. Pay employer contributions before corporation tax relief drops

• Corporation tax rates are set to fall from 20% to 19% from the financial year starting April 2017 with a further planned cut to 17% to effect from April 2020.
• Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate.

Don’t delay and don’t lose out. Call the pensions experts at Innes Reid on 01244 347583 or email info@innesreid.co.uk.

The post Year end: Make the most of your pension allowances! appeared first on Innes Reid.

There’s a family to raise, cars to drive, houses to buy, student debts to pay off and holidays to be booked, so you don’t need to worry about your pension yet, right?

Wrong!

It might seem like a long time until you finish work – and the chances are the retirement age will continue to rise as we all live longer – but the right time to start retirement planning is now!

After all, your retirement could be the longest and best holiday you ever have – as long as you make sure you have the funds to pay for it!

Put simply, paying into a pension is one of the easiest and most tax-effective ways of ensuring your financial future.

There may be other financial pressures – such as a bigger mortgage or a new car – but you should resist the temptation allow these issues to push retirement planning to the back of your list of priorities, because, the later you leave it to start planning for your retirement, the greater the risk of a miserable, never ending retirement affected by deprivation, financial hardship and poverty!

Retirement planning is all about the maths, but it’s not rocket science!

1. Time is Money

The money you invest earlier in life is potentially worth so much more than money invested later in life – this is because the investments have so much longer to grow in value, which is in no small way down to No 2.

2. Einstein’s Theory

Albert Einstein is said to have called compound interest the ‘eighth wonder of the world’, reportedly adding: “He who understands it, earns it; he who doesn’t, pays it.” Whether he said it or not, the way compound interest works is undeniable. Investment returns generate future gains, and the longer the money stays invested, the bigger the returns!

Consider Colin, who starts investing £400 per month net into his pension at age 25 and increases his contributions each year by 2.5% as his salary increases. By the time he reaches his State Retirement Age of 68, he has amassed a pension fund of £1,000,000.

His friend Carl puts off his retirement planning and only starts saving when he reaches age 35. Saving on the same basis, at age 68, his pension fund is only £556,000. In fact, because of the delay in order to match Colin’s fund, Carl would have to start his saving with monthly contribution of £716 net.

(Source: O&M Systems assuming basic rate tax relief at 20%, using mid range investment return of 5% per annum. These are representative projections and are not a guarantee of what you could receive at retirement. Past performance is not a guide to future performance. Inflation could reduce the real value of your pension savings.)

3. It’s not taxing

You can claim tax relief on your pension contributions, and the higher rate of tax you pay, the more money you can claim back! So, for those in the highest tax bracket, for every £100 invested in a pension, you can claim £45 in tax relief. Pensions are one of the most tax-effective ways for high-earners to save for the future.

4. Flexible Friend

These days it’s up to you when and how much you invest. In days of old (well, 30 years ago!), when you started a pension plan you had to invest a set monthly amount for a fixed period, and the amount you had to pay could increase. Now there are policies where you can change the amount you pay each month, make one-off contributions or choose not to pay in at all.

5. The long haul

One of the keys to a good pension is to be prepared for the highs and lows. People who pulled their money out of the Stock Market at the start of the financial crisis in 2008 have missed out on the rally in the markets in the past eight years. There is uncertainty again now, with the vote to leave the European Union, but that doesn’t necessarily mean it is time to give up on your long-term investments.

Retirement Planning – Speak to an Innes Reid pension expert TODAY and let us guide you through the pension maze and give you advice on how to save for your greatest adventure – retirement.

Call us on 01244 347583 or email info@innesreid.co.uk to arrange a free, initial consultation – we are available at times to suit you.

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If you are worried that you are too late to start saving for your retirement, this might be the solution.

Salary sacrifice is an important pension planning tool that permits employees and business owners to maximise the tax relief on pension contributions, with tax relief in excess of 60% possible.

Salary sacrifice means agreeing to a reduction in your salary in exchange for an alternative financial benefit. However, HMRC plan to change the rules for some financial benefits known as ‘benefits in kind’ – these include company cars, private medical insurance or even funding a mobile ‘phone contract.

The good news is that HMRC has confirmed that salary sacrifice for pension contributions is here to stay “because the government wishes to encourage employers to provide these [benefits] to employees.”

Example: The Benefits of Salary Sacrifice

Consider an employee earning £25,000 for the tax year 2016/17, who wants to contribute £100 a month (gross) to his/her personal pension.

The table below shows three different ways of funding the personal pension contribution and how the employee can benefit by using salary sacrifice.

• Column A: the employee makes the contributions personally from salary.
• Column B: the employee’s salary is sacrificed by the amount of the gross contribution, and employer pays into the pension – this gives the same pension contribution, with more take home pay.
• Column C: the employee’s salary is sacrificed to the amount which leaves the same take home pay, and the employer pays the sacrificed salary into the pension. This gives a larger pension contribution with the same take home pay.

Table: How the employee can benefit:

Summary:

To read more about salary sacrifice and see more examples click here:

Don’t delay and don’t lose out. Call the pensions experts at Innes Reid on 01244 347583 to start using pension salary sacrifice today.

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