Are you adding to the £164 million paid in needless pension tax?

Paying into a pension is a tax-efficient way of growing your retirement funds.

Not only are investment returns tax-exempt as your pot grows, but contributions generally benefit from tax relief to further boost your savings.

However, without careful planning, you could risk incurring an unnecessary tax charge for exceeding annual contribution thresholds. In fact, Financial Planning Today reports that pension savers paid a collective £164 million in Annual Allowance charges in 2024/25.

Read on to discover why some pension savers are incurring this “needless pension tax” and how you can avoid accidental charges.

Your pension contributions may be topped up with tax relief

Usually, your pension contributions are eligible for tax relief at your marginal rate of Income Tax:

• Basic rate: 20%
• Higher rate: 40%
• Additional rate: 45%

As such, boosting a pension pot by £100 would cost a basic-rate taxpayer £80, while higher- and additional-rate taxpayers would pay £60 and £55, respectively.

While 20% relief is usually automatically applied to your pension, higher- and additional-rate taxpayers need to claim their extra tax relief through Self Assessment.

Crucially, you usually only receive tax relief on contributions up to the value of your annual earnings.

Contributions over the Annual Allowance may be subject to a tax charge

While you may continue receiving tax relief up to your annual income, payments beyond the Annual Allowance are usually subject to a tax charge.

As of 2026/27, the Annual Allowance is £60,000. You can usually carry forward any unused Annual Allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years and have sufficient relevant UK earnings in the current tax year to support the total personal contribution.

However, you may have a lower allowance if you:

• Have a threshold income over £200,000 and an adjusted income over £260,000, at which point your allowance begins tapering
• Flexibly access your pension, triggering the Money Purchase Annual Allowance (MPAA).

In such cases, your tax-efficient limit may be as low as £10,000.

It’s important to note that all contributions to your pension count towards your Annual Allowance – including payments from your employer and anyone else.

The Annual Allowance charge effectively removes a portion of your tax relief

If the total paid in contributions is more than your Annual Allowance, you will usually have to pay tax on the contributions exceeding the threshold. This is generally applied at your marginal rate of Income Tax and effectively removes the tax relief received on those contributions.

It is important to distinguish between the Annual Allowance and the tax-relief limit on personal contributions. You can generally only receive tax relief on personal pension contributions up to 100% of your relevant UK earnings (or £3,600 gross if higher). Separately, contributions are tested against your available Annual Allowance, including any available carry forward. An Annual Allowance tax charge may apply if your pension savings exceed this amount.

You usually have two options for paying the tax on excess pension contributions:

1. Ask your pension provider to pay the charge directly from your pension pot, reducing your retirement savings.
2. Report the contributions as taxable income through Self Assessment and pay the tax yourself. Note that this will require you to have the funds set aside to settle the bill.

Calculating your Annual Allowance charge and choosing how to pay it can be complex, so speak to your financial planner for support.

You may choose to continue contributing despite the Annual Allowance charge

In some cases, you might choose to continue paying into your pension beyond your Annual Allowance and accept the tax charge. However, this should be a deliberate, informed decision – rather than an error.

As part of your retirement planning, it’s important to understand:

• Whether you have a reduced Annual Allowance
• Whether you have any unused allowance you could carry forward from previous years
• How much is being paid into your pension each tax year, including contributions from your employer.

Armed with this information, you can help ensure you don’t accidentally trigger a tax charge for exceeding your Annual Allowance.

Once you reach your tax-efficient limit for the year, you might choose to:

• Keep contributing to your pension to continue building your pot and benefiting from tax-efficient growth, while accepting the Annual Allowance charge
• Pay into your partner’s pension, if they have any remaining allowance (note this option may not be suitable in all circumstances)
• Save or invest your excess funds outside of a pension, such as using ISAs.

If you want to add a large lump sum, such as an inheritance, you might consider leaving a portion to contribute in the next tax year when your allowance renews.

The considerations and options above are not an exhaustive list: the factors and possible strategies will vary depending on your financial circumstances and needs. As such, it’s wise to speak to a financial planner before altering your pension contributions.

A comprehensive retirement plan can help determine your next steps

Pensions offer a number of benefits as you build towards your retirement goals, including tax-efficient opportunities to grow your pot.

However, the rules and limitations can be complex. Without understanding the nuances of how they apply to your unique circumstances, you could risk leaving money on the table.

At J Edward Sellars, our financial planners can support you in creating a comprehensive retirement plan that makes the most of your tax-efficient opportunities to grow your pension. As your financial and personal circumstances evolve, we’re always on hand to help you revise your plan and guide you to make informed decisions about your pension.

Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.