Pensions Tax Planning for high earners

Mitigating a high tax bill

With continuing intense pressure on government finances, the November 2025 Budget confirmed that the overall tax burden in the UK is on course for the highest overall tax burden in modern peacetime history, with higher earners continuing to shoulder most of the burden. Higher- and additional-rate taxpayers currently pay over two thirds of all income tax. Figures published by the government in June 2025 showed that the tax gap estimate, i.e. the difference between what tax is expected to be paid and actually paid, was 5.3% for the 2023/24 tax year. As a result, in order to close the tax gap, in the November 2025 Budget the government announced changes to raise about £26 billion a year in additional tax revenue by the end of the forecast period (2029/30). This will be achieved mainly via extending tax threshold freezes, and higher taxes on investment, savings and property income.

Around one in five income tax payers is currently taxed at the higher or additional rate, up from one in seven four years ago, and the proportion will continue to increase because of frozen tax allowances and bands until 5 April 2031. The threshold for paying additional-rate tax reduced from tax year 2023/24 from £150,000 to £125,140, while income between £100,000 and £125,140 is effectively taxed at 60% (67.5% in Scotland) because of the tapered reduction to the personal allowance.

Please note that all examples included in this guide are fictitious.

Mitigating a high tax bill

With continuing intense pressure on government finances, the November 2025 Budget confirmed that the overall tax burden in the UK is on course for the highest overall tax burden in modern peacetime history, with higher earners continuing to shoulder most of the burden. Higher- and additional-rate taxpayers currently pay over two thirds of all income tax. Figures published by the government in June 2025 showed that the tax gap estimate, i.e. the difference between what tax is expected to be paid and actually paid, was 5.3% for the 2023/24 tax year. As a result, in order to close the tax gap, in the November 2025 Budget the government announced changes to raise about £26 billion a year in additional tax revenue by the end of the forecast period (2029/30). This will be achieved mainly via extending tax threshold freezes, and higher taxes on investment, savings and property income.

Around one in five income tax payers is currently taxed at the higher or additional rate, up from one in seven four years ago, and the proportion will continue to increase because of frozen tax allowances and bands until 5 April 2031. The threshold for paying additional-rate tax reduced from tax year 2023/24 from £150,000 to £125,140, while income between £100,000 and £125,140 is effectively taxed at 60% (67.5% in Scotland) because of the tapered reduction to the personal allowance.

Please note that all examples included in this guide are fictitious.

The rising tax burden on income

Except in Scotland, the point at which you start to pay 40% income tax is £50,271 for 2025/26, having increased at less than two-thirds of the rate of inflation over the past ten years. The rate increases to 45% on income over £125,140. Over three million more people pay higher or additional rate tax in tax year 2025/26 than in 2020/21. You may also be feeling the impact of the tax on child benefit, which applies to those with income over £60,000, or you may be subject to tax on dividends which will increase by an additional 2% from April 2026. In Scotland, more tax is paid by high earners, up to a maximum rate of 48% in 2025/26.

The message is clear: if you want to reduce the amount of tax that you pay the solution is in your own hands. Planning could help you to lessen the rising tax burden – and we’re here to help.

This guide explores a key tax planning opportunity: making pension contributions. Pension contributions qualify for tax relief based on your highest rate, which means the rate of relief can currently be 20%, 40% or 45% (with a wider range of rates in Scotland). The effective rate of relief can be much higher if your pension contributions help you to avoid the withdrawal of child benefit or your personal allowance.

The guide also explains how a self-invested personal pension (SIPP) could help you to take control of your pension, and even to develop your business.

Planning point

Income tax thresholds have not kept pace with inflation and are now frozen, which means high earners should be aware of the tax-planning opportunities open to them.

Pensions – less tax now, more income later

The generous tax reliefs successive governments have given to pension arrangements mean that they have long played an important role in tax planning for high earners. This was limited from April 2011 by increasingly tight restrictions on these reliefs, but from tax year 2023/24 the maximum you can pay into a pension each year increased and the heavy tax charges on contributions exceeding a lifetime allowance were scrapped. This greatly enhanced the potential tax benefits from pensions, but the maximum available tax-free lump sum at retirement did not change.

The use of pensions in income tax planning is often divided into two areas: pre-retirement and at-retirement, but there is no direct link between physical retirement – stopping work – and drawing on a pension arrangement. You may draw benefits before retirement and make pension contributions after your working life has ended. In practice, it is possible to consider three phases:

• Before age 55 you can pay into a pension but cannot take anything out unless you are in serious ill health.
• Between age 55 and 74 you can pay in or draw out (or do both at once), which gives you real flexibility to manage your income as you move into retirement.
• From age 75 you can no longer receive tax relief on pension contributions, but you have a free choice of how much or how little you draw out each year.

Currently, pensions can also play an important role in combatting another tax that may concern you and your family: inheritance tax (IHT). Changes to the relationship between pensions and IHT are expected from 6 April 2027:  the table below summarises the current key tax benefits.

Contribution planning

Your personal contributions to a pension normally qualify for income tax relief at your marginal rate(s). Most commonly, individuals pay 80% of their contribution and the pension scheme claims the remaining 20% from the government. Therefore 20% tax relief is available to non-taxpayers and to those Scottish taxpayers whose highest tax rate is 19%. If your highest rate of tax is over 20%, you can claim the balance under income tax self-assessment.

Pension contributions reduce the income that is taken into account in the phasing out of the personal allowance where income exceeds £100,000, so they can potentially help you avoid an effective tax rate of up to 60% (67.5% in Scotland) on part of your income. Contributions can also help you to sidestep the additional-rate tax band, which starts at £125,140 of taxable income, or the high-income child benefit tax charge, which affects those with income over £60,000.

The rules on limits for tax relief are complicated. Total contributions, including deemed contributions to an employer’s defined benefit scheme (e.g. a scheme that provides a pension based on your final salary) must be kept within an annual allowance to avoid tax charges. This annual allowance is currently £60,000, but it reduces for those with ‘adjusted income’ over £260,000 and it is just £10,000 for adjusted incomes of £360,000 and over. ‘Adjusted income’ includes pension contributions paid by an employer or deducted from your pre-tax pay in addition to normal taxable income.

The annual allowance rules mean that for some people, for example consultants and other high-earning NHS staff, working extra hours can lead to high tax bills because of additional pension accrual in a defined benefits scheme. Professional advice is essential in these circumstances.

Regardless of your earnings, the maximum contribution to your pensions (excluding any defined benefit schemes) without tax charges falls to just £10,000 once you have started to receive payments from your pensions flexibly. Some exceptions to this rule apply, for instance if you only take a tax-free lump sum or if you buy certain types of lifetime annuity.

Carry forward

There are some special rules that may allow you to catch up on the pension contributions you could have made in the previous three tax years. In 2025/26, you can exploit your unused annual allowance dating back to 2022/23. This is known as ‘carry forward’.

The rules are relatively complicated, but, in theory at least, if your earnings are high enough and you have not paid into a pension in recent years, it would be possible to make up to £220,000 of pension contributions in 2025/26. This facility may be particularly helpful for those who had to reduce pension contributions because income was squeezed by high inflation.

If this type of planning could be relevant to you, then please seek our professional advice. Both the calculation of unused relief and the identification of contributions to tax years are often not straightforward.

Tax treatment varies according to individual circumstances and is subject to change.

Pension schemes and providers generally offer a wide range of investment funds, which meet the needs of most people. However, if you have already saved a substantial amount, a self-invested personal pension (SIPP) offers you the opportunity to take control of your pension investments.

A SIPP gives you a much wider choice of investments to suit your priorities and preferences, and if you have your own business, you may be able to use your pension to help develop it tax-efficiently. For example, you can hold commercial property and company shares in a SIPP, or you can build up a portfolio of investments. A SIPP also offers a flexible and tax-efficient way to turn the pension fund you have accumulated into an income for your retirement. There are, however, downsides to SIPPs which will be touched upon later.

Planning point

If you want more control over how your pension funds are invested, you may want to consider a SIPP, which allows you to choose how your savings are used.

What is a SIPP?

A SIPP is a form of personal pension that allows you, as the pension scheme member, to choose and control the investments within your pension plan. SIPPs are offered by most of the major providers, including investment platforms, insurance companies and specialist pension firms.

The benefits that you can draw from a SIPP and the contributions that can be made are subject to the same rules as any personal pension. The key differentiator is the range of investments available. These vary among providers, with insurance companies typically offering a more limited range that will suit most investors, while specialist providers may offer the full range. Typically, investment options include:

• a very wide range of investment funds;
• direct investment in stocks and shares;
• cash deposits;
• commercial property.

Whilst SIPPs allow a large range of investments, some options may not be appropriate for you, such as direct investment in overseas property or derivatives.

SIPP as part of your investment portfolio

Most SIPPs include funds and quoted investments, which you may hold alongside your other assets. It is important that your investments are integrated as far as possible and considered together in your financial planning.

A key consideration is ensuring that your investment portfolio balances risk and reward in a way you are comfortable with. This will take account of the time horizon of your investments as well as your personal attitude. This will largely be reflected in asset allocation, which is simply the balance between secure but low-growth investments, such as cash deposits, and more risky but higher-potential investments, such as company shares. You will also need to consider the selection of investment funds/index trackers, which are likely to make up a large part of your portfolio, and ensure they are suitably diversified and reviewed regularly.

The taxation of investments can also help determine whether they are held inside your SIPP or elsewhere in your investment portfolio, with dividends over the allowance of £500 a year in tax year 2025/26 subject to tax.

Consolidating your pensions in a SIPP                                               

Many of us build up several different pensions over the years. Some pension funds may still be with former employers, while others are those we have saved ourselves. Some may have high charges and under-performing investments. Consolidating old pensions into a SIPP can reduce charges and allow investments to be made that meet your needs better.

This must be done with caution. Some employer schemes have very low charges, so you could pay more after switching to a SIPP and you will need to be confident this is justified by the additional investment flexibility. Even more importantly, you must be careful about giving up guarantees in your old pension arrangements. Some older arrangements, which are usually on a ‘with profits’ basis, guarantee the terms on which you can convert your pension fund into an income through an annuity. Guaranteed annuity rates can give you a pension that could be twice as high as buying the best annuity available on standard rates today, but this may be subject to restrictive terms.

Commercial property investment

A major attraction of SIPPs is that certain types can invest in commercial property.

Commercial property can be let to the pension scheme member’s company or partnership. You can even sell a property that you or your business owns to the pension scheme (although this might result in a tax charge on any capital gains). Any sale transaction must use an arm’s length valuation because there are tax penalties for ‘value shifting’, for example undervalued sales to your pension scheme. Similarly, the business must always pay a full commercial rent, which the SIPP will receive tax free.

A SIPP can borrow up to 50% of its net assets for property investment (or any other purpose). Often SIPP property purchase is financed by a combination of transfers from previous pension arrangements, new contributions and borrowing.