Tips for year-end pension tax planning

  • Describe the basic year-end tax planning relating to pensions
  • Explain allowances
  • Describe the situation with child benefit
Tips for year-end pension tax planning
With the freezing of various tax allowances this April, many employees may unwittingly find themselves dragged into a higher tax bracket. (FT Money)

The end of a tax year should trigger thoughts about making the best use of available tax reliefs – and pension contributions should be high on the list of things to think about. 

Recent analysis by the Pensions Policy Institute found that only 39 per cent of households and 37 per cent of individuals are on track to meet the Pensions Commission’s retirement income targets. 

Whether you are an employee or business owner, here are some of the key planning points to consider before April 5.

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Benefits of pensions

Before delving into how to maximise allowances, it is worth noting some of the key benefits of pensions:

Tax relief on contributions

Tax relief is given on personal pension contributions at the individual’s marginal income tax rate. For higher rate (40 per cent) and additional rate (45 per cent) taxpayers, this makes pensions very attractive. 

Tax-free investment growth

Once invested, any income and gains that arise within the pension scheme are not subject to tax. This allows the fund to compound and grow in value quicker than a fund that suffers annual taxes.

The 25 per cent tax-free lump sum

At the point you become eligible to start drawing money from your pension, the government allows up to 25 per cent of the fund to be taken out as a tax-free lump sum. 


Up to now this has been subject to a cap of 25 per cent of the individual’s available lifetime allowance at the time the sum is taken. 

Although chancellor Jeremy Hunt announced in the spring Budget that the LTA would be scrapped from April 6 2023, the tax-free lump sum continues to be capped at existing levels. For most individuals the LTA is £1,073,100.

Inheritance tax benefits

Pensions do not generally form part of an individual’s estate for IHT purposes.

The nominated beneficiaries may be able to inherit the accumulated pension wealth free of IHT, and therefore this presents a tax-efficient way of passing wealth through generations.

In most cases where the individual has died before reaching the age of 75 the entire fund can be passed on tax-free. 

After the age of 75, the person(s) inheriting the pension will usually be taxed on any benefits at their own marginal income tax rate.

Pension allowances

With all the advantages that pensions offer, it will be no surprise to learn HMRC places limits on the amounts that can be contributed in any one tax year without incurring a tax charge.

The current annual allowance for individuals is 100 per cent of UK relevant earnings up to a maximum of £40,000. However, at the spring Budget it was unveiled that the annual allowance would be increased to £60,000 from April 6 2023.

Note that this allowance is reduced where the individual has either flexibly accessed their pension – in which case the allowance reduces to £4,000 a year (£10,000 from April 6 2023) – or is classed a high earner.