The start of a new tax year is the perfect time to take a proactive approach to pension planning.
Rather than scrambling to use up allowances before the deadline next April, getting ahead now can maximise the benefits and give your pension pot an extra boost.
Pension allowances are a 'use it or lose it' deal—once the year is gone, so is your opportunity to contribute within that year’s tax-efficient limits. Making the most of them early means your investments have more time to grow, and you avoid the stress of last-minute tax planning.
Why Plan Pension Contributions Early?
- More Time in the Market – By contributing at the start of the tax year, your money benefits from extra months (or even years) of tax-free growth compared to those who wait until the last minute.
- Maximise Tax Efficiency – Whether you're a higher or additional rate taxpayer, using pension contributions can help reduce your taxable income and keep key allowances intact.
- Avoid Tax Traps – Bonuses, salary increases, or investment gains later in the year can push your income above key tax thresholds. Early pension contributions can help keep you below these limits.
- Less Financial Stress – Spreading pension contributions across the year rather than rushing at the end makes financial planning smoother and more manageable.
Making the Most of Pension Allowances
The Annual Allowance for pension contributions is currently £60,000 per year (subject to tapering for very high earners). If you have unused allowances from previous years, you may be able to carry them forward—but only for up to three years. Getting ahead now ensures you don’t miss out.
If you receive a bonus at the start of the year, considering bonus sacrifice is a smart move.
Instead of taking the cash (which is immediately taxed), you could ask your employer to pay it into your pension instead. This means:
- No Income Tax or National Insurance (NI) is deducted, so you get more into your pension than you’d get in your pocket.
- Your employer saves on their NI contributions—many are happy to pass this saving on to your pension.
- You could avoid losing your personal allowance (if your income is over £100,000) or prevent reductions in Child Benefit (if your income is over £60,000).
Example: How Bonus Sacrifice Works
Maria, 45, earns £70,000 per year and receives a £10,000 bonus. If she takes it as cash, after 40% tax and 2% NI, she’d receive just £5,800 in her hand. Her employer also pays £1,380 in NI, bringing the total cost to £11,380.
If Maria sacrifices the bonus into her pension instead:
- The full £10,000 is invested without any need to reclaim higher rate tax relief.
- If her employer passes on their NI saving, she could receive £11,380 into her pension instead of just £5,800 in her bank account!
At retirement, if she’s a basic rate taxpayer, she could withdraw up to £9,673 net from this pot—66% more than if she’d taken the bonus as cash. If she remains a higher rate taxpayer, she could still see a 37% increase on what she would have taken home.
Avoiding Tax Pitfalls
Many people don’t realise that pension contributions can help them avoid tax traps, including:
- The High Income Child Benefit Charge – If you or your partner earn over £60,000, Child Benefit is reduced, disappearing completely at £80,000. A well-timed pension contribution can bring your taxable income down and help retain these benefits.
- Losing Your Personal Allowance – Earn over £100,000? For every £2 over this threshold, you lose £1 of your tax-free personal allowance. A pension contribution can keep your income below this limit and provide 60% effective tax relief.
Why Act Now?
Waiting until the tax year-end means you might:
- Lose a year’s tax-free investment growth.
- Struggle to find funds for a last-minute pension top-up.
- Miss out on using your full annual allowance.
By planning ahead, you take control of your finances, maximise your tax reliefs, and give your future self a financial boost. Start the tax year strong—your retirement will thank you for it!
At Willow Tree Financial Services, we offer personalised advice on Financial Planning, Mortgages, Investments, Pensions, Personal & Business Protection, and Wills, Trusts & Estate Planning — all tailored to your individual goals and circumstances.
Call us on 01323 436680, get in touch here, or book an appointment here to get started.
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The value of investments and pensions, and any income they produce, can fall as well as rise. You may get back less than you invested. The Financial Conduct Authority does not regulate wills, trusts, estate planning, and lasting power of attorney.
