Pensions are a superpower in financial planning. Just think about what they offer: upfront tax relief on contributions, tax-free growth inside the wrapper and (until recently) a favourable inheritance tax treatment. It’s little wonder pensions are a pillar in most financial plans.
However, pensions can also be a minefield. Successive governments have layered extra (and complicated) rules. Restrictions and tapers can be unclear - creating a series of traps that can catch out even financially savvy individuals.
Getting pensions wrong can be costly: unexpected tax bills, lost relief or a charge that wipes out years of careful saving. Getting them right, however, can supercharge your progress towards your long-term financial goals.
Here, our financial planners at Castlegate walk through the most significant pension tax traps in 2026, why they arise and - crucially - how to avoid them.
Tax relief is a fantastic mechanism for building your retirement savings. In 2025-26, a basic rate taxpayer gets 20% relief on their contributions. In effect, this means it “costs” them 80p to put £1 into their pension. For higher rate and additional rate taxpayers, they can claim extra tax relief via their tax return (self-assessment).
The most you can contribute to pensions each year - whilst claiming tax relief - is £60,000; or, up to 100% of your earnings (whichever is lower). If you go over this, HMRC will levy a charge on the excess at your marginal income tax rate.
This might sound straightforward enough, but the trap is more subtle than it appears. The annual allowance is not just about what you personally contribute. It also includes:
Many people who receive generous employer contributions or are members of public sector pension schemes are closer to the limit than they realise.
So, be careful to monitor your total pension input each year, not just your personal contributions. If you are in a DB scheme, request a pension input statement from your administrator.
And remember: carry forward allows you to use unused annual allowances from the previous three tax years, which can provide meaningful headroom if you have a large one-off contribution to make.
For higher earners, pensions get even more complex. The tapered annual allowance reduces the £60,000 limit for individuals whose “adjusted income” exceeds £260,000.
For every £2 of adjusted income above this threshold, the annual allowance falls by £1, down to a minimum of £10,000. “Adjusted income” is not simply your salary. It includes:
This means someone with a salary of, say, £220,000 who receives a large employer pension contribution could find themselves subject to tapering without expecting it.
The consequences are severe. Breaching a tapered allowance can result in a tax charge that, for an additional-rate taxpayer, amounts to 45p in every pound of excess.
For those near the threshold, the interaction between earnings and pension contributions needs careful modelling at the start of each tax year - not as an afterthought in March.
One important consideration: threshold income (which is calculated before adding employer contributions) must also exceed £200,000 for the taper to apply.
This is one of the most commonly misunderstood restrictions in pension planning, and the consequences of triggering it can be severe.
Once you have flexibly accessed any money from a defined contribution (DC) pension, the Money Purchase Annual Allowance (MPAA) is triggered.
From that point forward, your annual allowance for further DC contributions drops from a maximum of £60,000 to just £10,000.
Here are some potential triggers of the MPAA:
This trap is especially pertinent to those who want to access pension funds early - perhaps to bridge a gap in income during a career break - and then resume full-time employment with generous employer contributions.
The £10,000 MPAA may be breached simply through ongoing workplace contributions, without any deliberate action on the part of the individual.
Critically, the MPAA cannot be increased using carry forward. Once triggered, it applies for the rest of your life. This makes it essential to take advice before accessing any pension flexibly, particularly if you are still working or intend to return to work.
Most people know they can take 25% of their pension tax-free at age 55 (rising to 57). What many do not realise is that the rules changed significantly in the Spring Budget 2023.
This introduced the Lump Sum and Death Benefit Allowance. The result was the Lump Sum Allowance (LSA), which caps the total tax-free pension cash most people can take over their lifetime at £268,275.
This is derived from 25% of the old Lifetime Allowance of £1,073,100. Once you have taken £268,275 in tax-free lump sums across all your pension withdrawals, any further lump sums are taxable in full at your marginal rate - regardless of how large your remaining pension pot is.
For those with substantial pension savings, this is especially important. It means the assumption that “a quarter is always tax-free” simply no longer holds.
As such, be careful to consult a financial adviser about how to carefully sequence withdrawals, how to plan which benefits to crystallise - and when. These steps can make a significant difference to the overall tax efficiency of drawing down a large pension.
At Castlegate, we help clients navigate pension complexity at all stages of their financial journey - from optimising contributions during working life to structuring withdrawals tax-efficiently in retirement and planning for how wealth passes to the next generation.
If you would like a no-obligation review of your pension position, please call to speak to our team for a free consultation. The earlier you take stock of where you stand, the more options will be available to you.
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.
Castlegate Financial Management Limited is registered in England No. 2077374. Registered Office: 8 Castlegate, Grantham, Lincolnshire. NG31 6SE. Authorised and Regulated by the Financial Conduct Authority. FCA No. 169777.
