It’s something everyone has to think about, but nobody actually really enjoys doing – putting money away for your pension in retirement. Following law changes in recent years, UK workers are now automatically opted in to workplace pension schemes unless they opt out (but you shouldn’t do that).
Everyone should have at least some private pension funds to draw on when they retire on top of the state pension. But there is a rule that allows you to put even more money into pensions to help you in later life, and this is usually capped at £60,000 a year. That means you can put away £60,000 every year into pensions, free from tax, to save it for retirement.
However, those who earn certain amounts of money are being told that they actually face cuts to pensions limits which could cost them as much as £50,000 a year. According to the Low Incomes Tax Reform Group (LITRG), the annual allowance for pension contributions for this tax year, 2025-26, is set at £60,000.
It says: “This means that to get full tax relief, the amount paid into all your pensions by you or on your behalf (including contributions made by your employer) cannot exceed £60,000.”
But for people with higher incomes, or who access their pension money in a certain way, the allowance can be as low as £10,000, a drop of £50,000. For those earning £260,000 or more, the annual allowance is cut down by £1 for every £2 your income goes over the threshold, down to just £10,000.
Gov.Uk says: “If your adjusted income is over £260,000 your annual allowance in the current tax year will be reduced.
“It will not be reduced if your threshold income for the current tax year is £200,000 or less, no matter what your adjusted income is.
“If the pension savings made in the tax year are more than your available annual allowance, you should include the excess amount on your Self Assessment return. Your available annual allowance is your reduced annual allowance plus any unused allowance from the previous 3 tax years.”
There is also another circumstance where your allowance could be cut to £10,000 – if you access money in a Money Purchase pension.
LITRG adds: “If you flexibly access money in a defined contribution or money purchase pension, the annual allowance drops to £10,000. This is known as the money purchase annual allowance (MPAA). Again, this figure includes contributions made by your employer.
“The idea of the MPAA is to stop people who have already accessed taxable amounts of their pension savings recycling that money back into a pension scheme. This is because the reinvestment can generate additional tax relief and build up a fresh entitlement to tax free cash and pension benefits.”
