As the tax year-end approaches, director-shareholders and self-employed individuals have a crucial opportunity to maximise their retirement savings whilst reducing their tax liabilities. Private pension contributions remain one of the most tax-efficient ways to save for the future, providing significant relief on income tax whilst securing long-term financial stability. With changes on the horizon, it’s essential to review your contributions before 5th April 2025 to ensure you are making the most of the available allowances and tax benefits.
Why are private pension contributions important?
Private pension contributions offer relief at your highest marginal tax rate, meaning that basic-rate taxpayers receive 20% relief, higher-rate taxpayers 40%, and additional-rate taxpayers 45%. This makes pensions an attractive way to extract profits from a business in a tax-efficient manner. However, the rules surrounding pensions are changing and new government measures, such as the introduction of pensions dashboards and potential reforms to inheritance tax, could impact how pension savings are managed in the future. Staying informed about private pension options now can help you make better decisions before these changes take effect.
Understanding tax relief
One of the key advantages of private pension contributions is the tax relief available. The annual pension allowance for the 2024/25 tax year is £60,000, allowing individuals to contribute up to this amount tax-free, providing they have sufficient earnings. For high earners, the tapered annual allowance may reduce the amount they can contribute, making it essential to review their contributions before the end of the tax year. Making the most of private pension tax relief now ensures that your retirement savings grow in the most tax-efficient way possible.
Another important factor to consider is the ability to carry forward unused pension allowances from the previous three tax years. This means that if you haven’t maximised your contributions in previous years, you may be able to make a larger private pension contribution before 5th April 2025 and still receive full tax relief. Reviewing your pension contributions now can help ensure that you don’t miss out on any available tax-saving opportunities.
The changing pension landscape
The private pension landscape is set to change significantly over the coming years. The long-awaited pensions dashboard, expected to launch in 2025, will provide savers with an overview of all their pension savings in one place. This is expected to improve financial literacy and encourage better retirement planning. Additionally, new pension “megafunds” are being introduced, consolidating pension schemes to drive economic growth whilst increasing efficiency for savers.
Another major change on the horizon is the potential for private pensions to become subject to inheritance tax from April 2027. Currently, pensions are one of the most tax-efficient ways to pass on wealth, but proposed changes could mean that unspent pension funds are included within an estate’s value for tax purposes. This could significantly impact how individuals plan for retirement and inheritance, making it even more important to review private pension contributions before the tax year-end.
Maximise your benefits with expert advice
With tax relief available and changes on the way, now is the time to take action. Ensuring that you are making the most of your private pension contributions before 5th April 2025 can help secure your financial future whilst reducing your tax burden. Whether you are a business owner looking to extract profits efficiently or an individual seeking to boost your retirement savings, strategic pension planning is key.
At Accounts & Returns, our expert team, including ex-HMRC staff, can help you navigate the complexities of private pension contributions, ensuring you stay compliant whilst maximising tax efficiency. Get in touch today to review your pension strategy before the tax year ends and make the most of your allowances whilst they last.
