Pension Savings in 2025/26 – What to Know and What to Watch
With pension rules seeing significant updates in recent years, it’s more important than ever to stay on top of what you can contribute tax-efficiently. The 2025/26 tax year continues many of the changes first announced in 2023, with some key figures and rules that affect employees, employers, and self-employed individuals alike.
Here’s a breakdown of what’s changing, what’s not, and what to think about when planning your pension strategy this year.
Quick Recap: Why Pensions Matter for Tax
Pension contributions are one of the most effective ways to reduce your tax bill. Whether you’re an employee, business owner, or running your own limited company, contributing to a pension can:
- Lower your taxable income
- Provide long-term investment growth
- Offer 25% of your pot tax-free at retirement
- Pass on more of your wealth tax-efficiently
But the government limits how much you can save each year while still claiming tax relief. Let’s look at those limits.
1. The Annual Allowance
The Annual Allowance is the total amount you can contribute to pensions each year and still receive tax relief.
For 2025/26, the allowance is:
- £60,000 per tax year
- Includes all contributions (personal + employer)
- May be reduced for high earners through the Tapered Annual Allowance
💡 If you don’t use your full allowance, you may be able to carry forward unused amounts from the previous 3 tax years.
2. Auto-Enrolment Contributions
Employers must automatically enrol eligible workers into a pension scheme and contribute on their behalf. In 2025/26, minimum contributions remain:
- Employee: 5%
- Employer: 3%
- Total: 8% of qualifying earnings (£6,240–£50,270)
✅ Businesses can contribute more if they wish—and many do as a staff retention tool.
3. Employer Pension Contributions (for Limited Company Directors)
Running a limited company? Making employer contributions from the business is often more tax-efficient than taking a dividend and contributing personally.
- The company gets corporation tax relief on pension contributions
- No income tax or NIC for the director
- Doesn’t affect your personal annual allowance usage
🚨 Contributions must pass the wholly and exclusively test—make sure they’re justifiable.
4. Money Purchase Annual Allowance (MPAA)
The MPAA applies once you’ve started drawing money from a pension (outside of the tax-free lump sum). It restricts how much you can pay back in with tax relief.
- The MPAA is £10,000 in 2025/26
- Triggered when you take flexible income from a pension pot
- Once triggered, you can’t carry forward unused allowances
This rule often catches people out, especially those doing phased retirement.
5. Lifetime Allowance (Scrapped)
The Lifetime Allowance was scrapped in April 2024, and this continues into 2025/26.
Previously, there was a cap (just over £1 million) on how much you could hold in pensions tax-free. That cap is now gone—though some restrictions remain on how much of your pot you can take as a tax-free lump sum (currently 25% of the old allowance, i.e., £268,275).
What Should You Be Doing?
✔️ Employees:
- Check your auto-enrolment status
- Consider boosting your contributions—especially if your employer matches them
✔️ Business Owners:
- Speak to your accountant about making employer contributions from the company
- This could be more tax-efficient than dividends, especially if you’re a higher-rate taxpayer
✔️ Near Retirement?
- Be mindful of triggering the MPAA if you’re drawing flexible income
- Consider maximising your annual allowance before you do
✔️ Everyone:
- Review your pension provider’s charges and performance
- Consider consolidating old pots if appropriate
Don’t Forget Tax Relief!
When you make personal contributions:
- You get 20% tax relief at source
- Higher and additional rate taxpayers can claim extra relief via their Self Assessment
E.g., a £100 gross pension contribution costs:
- £80 for a basic-rate taxpayer
- £60 for a higher-rate taxpayer (after reclaiming the extra £20 via tax return)
Final Thoughts
Pensions remain one of the most generous and flexible ways to save for the future—especially for business owners.
Whether you’re boosting your retirement pot or reducing this year’s tax bill, getting the structure right is key. And with the annual allowance now at £60,000, there’s real scope to make meaningful contributions in 2025/26.
Thinking about how to use your pension allowances wisely this year?
Yorkshire Accountancy can help you plan contributions in the most tax-efficient way—whether you’re an employee, director, or self-employed.
