5 clever ways to boost your pension pot before April 2024

The end of the tax year is approaching on 5 April 2024, and there’s still time to give your pension pot a welcome boost before then.

In fact, thanks to various pension changes introduced during this tax year, such as the abolition of the Lifetime Allowance (LTA) charge and an increase to the Annual Allowance, you could potentially add more funds tax-efficiently to your pension than you’ve been able to in previous years.

Read on to learn five clever ways to enhance your pension pot before the tax year ends.

1. Make full use of your increased pension Annual Allowance

The Annual Allowance is the maximum amount you can contribute to your pension in a single tax year without facing an additional tax charge. It includes contributions made by you, your employer, and other third parties.

On 6 April 2023, the Annual Allowance increased from £40,000 to £60,000, or 100% of your earnings. However, your allowance may be lower if your income exceeds certain thresholds, or you have already flexibly accessed your pension.

The amount of tax relief you receive on your pension contributions is based on the rate of Income Tax you pay. Basic-rate taxpayers get 20% tax relief, higher-rate taxpayers receive 40%, and if you’re an additional-rate taxpayer, you’ll get 45% pension tax relief.

This tax relief could make your pension a tax-efficient way to invest for the long term. So, by using your full Annual Allowance before it resets on 6 April 2024, you could give your pension pot a significant boost.

Additionally, paying more into your pension could potentially reduce the amount of your income that is taxed.

This might become an increasingly attractive option as more people are being pushed into a higher tax bracket by the freeze on Income Tax thresholds (until 2027/28). Indeed, research published by MoneyWeek has revealed that 1 in 5 taxpayers could pay higher-rate Income Tax by 2027.

2. Remember to carry forward unused Annual Allowance

Any unused Annual Allowance can be carried forward for up to three tax years. So, you have until 5 April 2024 to use any unused allowance from 2020/21 onwards.

This means, that if you were entitled to the full Annual Allowance for the past three years, you could pay up to £180,000 in the 2023/24 tax year.

However, the amount you can carry forward is limited to 100% of your earnings in the tax year in which you are making the contributions.

Imagine your income is £80,000. Any pension contributions that exceed this amount will not be tax-efficient, regardless of how much unused Annual Allowance you have remaining from the past three years.

3. Consider resuming pension contributions if you stopped to avoid a Lifetime Allowance charge

Before 6 April 2023, if you accrued more than £1,073,100 in pension benefits, you might have paid a Lifetime Allowance (LTA) charge on the excess, depending on how you drew it.

This was a 55% charge on lump sums, or a 25% charge on income on top of your marginal rate of Income Tax.

So, you might have stopped making pension contributions if you were approaching the LTA to avoid a hefty tax charge. According to research published by Professional Adviser, 16% of taxpayers said they did so.

However, the LTA charge was removed on 6 April 2023 and the limit will be completely abolished from April 2024.

So, you might want to consider resuming your pension contributions and continuing to build your retirement nest egg.

Remember, you’ll only enjoy tax relief on pension contributions within the Annual Allowance (as explained above). Also, the maximum tax-free amount you can take from your pension has been frozen at £268,275 (25% of the original LTA), unless you previously applied for LTA protection, in which case your tax-free lump sum may be higher than this.

So, while the abolition of the LTA means you could build a larger pension pot without incurring a potentially significant tax charge, you’d be wise to monitor your annual contributions and seek advice before making withdrawals to ensure you do so in a tax-efficient way.

4. Take advantage of the increased Money Purchase Annual Allowance

Once you start drawing flexibly from your defined contribution (DC) pension, you could trigger the Money Purchase Annual Allowance (MPAA). This reduces your Annual Allowance and so limits the tax relief you could benefit from on future contributions.

Fortunately, the MPAA increased from £4,000 to 10,000 on 6 April 2023.

So, if you have retired or started to flexibly draw a pension income, but have continued or are returning to work, this increase could allow you more scope to make tax-efficient pension contributions.

5. Plan your pension contributions as a couple

Planning your pension contributions as a couple could help you save more tax-efficiently by using both of your Annual Allowances.

For example, if you’ve used your full pension Annual Allowance, you could pay into your partner’s pension, generally up to their annual salary as they have their own Annual Allowance, which might be £3,600 if they aren’t working. Tax relief will be given at your partner’s marginal rate of tax.

Similarly, a pension tax relief is calculated based on an individual’s Income Tax band. So, if one of your is a higher-rate taxpayer, it may be wise to prioritise paying into the higher earner’s pension.

Maximising your tax-efficient savings as a couple in this way, could help ensure that you both have a healthy retirement fund later in life.

Indeed, pensions are a tax-efficient way to save for most people. And while it may be wise to monitor your pension contributions year-round, now is the time to make the most of allowances before they reset on 6 April 2024.

Download your free guide: 7 allowances you might want to use before the end of the 2023/24 tax year to find out more.

Get in touch

If you have further questions about how to boost your pension savings before the end of the tax year and beyond, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

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

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.

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 Pension Regulator.