Is it still worth saving into a pension if tax relief changes?
Q: How does pension tax relief work now?
Pension tax relief refunds the income tax you’d otherwise pay on your contributions, making saving for retirement cheaper. Investments grow tax-free, and 25% of your pension can be taken tax-free at retirement.
Q: What are the main systems?
- Net pay schemes: Contributions come out before income tax, so higher earners automatically get 40% or 45% relief.
- Relief at source: Contributions are made after tax, but 20% relief is claimed back from HMRC. Higher earners claim extra relief via their tax return.
Q: What about salary sacrifice?
With salary sacrifice, part of your pay is exchanged for pension contributions. This reduces both income tax and National Insurance, and your employer saves NI too. The trade-off is a lower official salary, which may affect things like mortgage applications.
Q: Is there a limit to how much I can pay in?
Yes. The annual allowance is £60,000 for most people. Contributions above this may trigger a tax charge.
Q: What could change in the Budget?
The government is considering replacing tax relief at an individual’s income tax rate with a flat-rate bonus – for example, 30%. This would benefit basic-rate taxpayers but reduce the advantage for higher earners.
Q: Should I still pay into a pension?
Yes. Even with possible reforms, pensions remain one of the most tax-efficient ways to save for retirement. The system may change, but tax benefits won’t disappear altogether.