Pension tax relief - one of the most powerful tools for building a retirement pot in 2025-26. Not only can it boost your wealth growth over years of contributions, but it can also help people to save on taxes in the short term.
However, with the Autumn Budget on the horizon (expected 26 November), tax relief is in the media spotlight as a potential area of change for the Chancellor. Below, our financial planners explain how tax relief works at the time of writing, what you need to know leading up to this key budget, and how to protect your retirement savings.
Tax relief is a scheme designed by the UK government to incentivise British citizens to save for retirement. In simple terms, when you put money into your pension (e.g. out of your pay packet into your workplace scheme), the money you would have paid in tax goes to your pension.
In 2025-26, a basic rate taxpayer gets 20% tax relief on their pension contributions. In effect, it “costs” the person 80p to put £1 into their pension. A higher rate taxpayer can claim an extra 20% via their tax return (if the “relief at source” method is used), so they only “pay” 60p to contribute £1. Additional rate taxpayers can get 45% tax relief.
There are certain limits on how much you can contribute to your pension whilst enjoying tax relief. Currently, the annual allowance (maximum yearly limit) is £60,000 - although yours may be lower if your earnings are below this.
In certain cases, it may be possible to use the “carry forward” rules to access unused allowance from up to three previous tax years. However, check with a financial adviser about whether you qualify. For instance, if you have triggered the money purchase annual allowance (MPAA), then carry forward will not be available to you.
Earlier in her political career, Chancellor Reeves called for a flat rate of tax relief on pension contributions. She has rowed back on this in more recent years, but many fear that some form of this proposal could reemerge in the Autumn Budget as the government lays out its proposals to stabilise the UK’s public finances.
Such a move (e.g. equalising tax relief for everyone at 25%) would likely be bad news for higher and additional rate taxpayers. As such, there may be a case for making further contributions to a defined contribution (DC) pension before 26 November, when the budget is expected.
However, big financial decisions like this should be carefully discussed with a financial adviser beforehand. After all, knee-jerk reactions around pensions can be costly if not carefully planned. An expert can help you identify key information you miss on your own, helping you avoid issues that might leave you financially exposed.
There are media reports of individuals “fleeing” to ISAs and pensions to try and outsmart the Chancellor. However, given the lack of certainty about what the government will decide, there is little evidence that such moves will not, in fact, prove more damaging.
One particularly worrying statistic is that 6% of survey respondents stated they had taken some (or all) of their tax-free cash (TFC) before last year’s Autumn Budget. One-third of this group admitted that they had done this because they believed the Chancellor might change the TFC rules.
The potential problem, however, is that heavy withdrawals could undermine your financial goals for retirement (e.g. leading to less income to support your lifestyle). There may also be issues (e.g. an unpleasant tax bill) if someone later tries to put any withdrawn TFC back into a pension if the Chancellor, in fact, does not change the rules.
Frustratingly, the future of tax relief and other pension rules remains uncertain until we actually hear from the Chancellor on 26 November. At which point, clients and advisers will need to carefully navigate the new landscape.
For instance, the Chancellor might leave pensions untouched. Or, perhaps salary sacrifice is altered/removed, or the lifetime allowance (LTA) is brought back in some form. The best thing you can do? Remain calm, and don’t act out of speculation. Remain true to your long-term financial plan, and if changes come, you can speak to your adviser about how to adapt (if you need to).
Pensions are a powerful - yet complex - area of financial planning. At Castlegate, we are here to guide you through the questions you have about planning for retirement, giving you the clarity and peace of mind to help you progress towards your financial goals.
If you’d like to ensure you’re taking the right steps to protect your wealth and safeguard your financial future, please get in touch.
Your capital is at risk. Investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not indicative of future results. Diversification does not guarantee profits or fully protect against losses. Tax treatment depends on individual circumstances and may change in the future. This content is for information only and does not constitute personal financial advice. Readers should seek independent financial advice before making any investment decisions.
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