With the Autumn Budget set for 30 October, there is growing speculation that changes to pensions could be on the horizon.

One rumour is that higher- and additional-rate taxpayers will get a lower rate of tax relief on their pension contributions than they do currently.

We won’t know the specific details or start dates of any new policies until they’re announced at the Budget. It’s usually best to avoid short-term decision-making and instead focus on a well-thought-out long-term plan.

However, if you were planning to top up your pension anyway and you’re in a higher- or additional-rate tax band, it’s worth thinking about how you can make the most of your contributions.

Here, we discuss what the potential changes might mean for you.

What could change?

Currently, personal pension contributions benefit from tax relief at your highest rate of income tax.

If you pay £80 into a personal pension, an additional £20 is automatically added as basic-rate (20%) tax relief. Higher-rate (40%) and additional-rate (45%) taxpayers¹ can then claim back an extra £20 or £25 through their self-assessment tax return.

However, it is rumoured that the Chancellor might introduce a flat rate of tax relief of between 20% and 30% for everyone.

This would aim to equalise the benefit across income brackets, but it would mean reduced benefits for those currently enjoying higher rates of tax relief.

Making the most of your pension

If these changes come into effect, higher- and additional-rate taxpayers will lose out on some tax advantages, but there would still be significant benefits for the majority of UK taxpayers.

If you’re in a higher tax band, you might want to consider bringing forward your pension contributions, depending on when any potential changes come into effect. That way, you’ll be able to make the most of higher rates of relief.

If you’re a member of a workplace pension scheme, it could be worth asking your employer if you can increase your contributions. Some employers will match your own contributions, which can really help to boost your pension over time.

Currently, you can get tax relief on pension contributions of up to 100% of your gross relevant earnings², capped at £60,000 (2024-25 tax year). This limit is called the ‘annual allowance’ and it includes contributions from you and your employer before tax. Bear in mind that your annual allowance might be lower if you have a high income³ or you’ve already flexibly accessed your pension pot.

If you didn’t fully use your pension annual allowance in the previous three tax years, and you haven’t flexibly accessed your pension⁴, it might be possible to ‘carry forward’ the unused amount and contribute more than the current annual allowance. In the 2024-25 tax year, it’s theoretically possible that someone could save up to £200,000 in pensions: £60,000 for 2024-25 and 2023-24, plus £40,000 for 2022-23 and 2021-22. However, you must earn at least the amount you wish to contribute to benefit from tax relief. So, someone who wants to make total contributions of £200,000 in the 2024-25 tax year must earn at least £200,000.

Carry forward could be especially beneficial right now, enabling higher- and additional-rate taxpayers to maximise their pension savings before any potential changes.

What to consider before topping up your pension

While it might make sense for some people to top up their pension ahead of any potential changes, it won’t necessarily be right for everyone.

First and foremost, it’s important to consider whether you can afford to pay more money into your pension. After all, you can’t take money out of your pension until at least age 55, rising to age 57 in April 2028. Make sure you’re comfortable locking away your money for what could be several decades.

If you think you’ll need to access your money before retirement, an individual savings account (ISA) could be a better option. You don’t get tax relief on ISA contributions, but you can take your money out whenever you like without paying tax. You can currently pay up to £20,000 into ISAs in the 2024-25 tax year.

Paying more money into an ISA could also be a timely move. There is some speculation that a lifetime cap on ISA savings will be announced at the Autumn Budget or by a future government. If this is introduced, it could limit how much you can contribute to ISAs over your lifetime or how big your pot can become.

Spreading your investments across a range of accounts – including ISAs and pensions – can reduce some of the risk that tax laws, as well as your personal circumstances, will change. Contributing to and withdrawing from different accounts can also prove more tax-efficient in the long run, helping to lower the overall costs of investing.

Budget aside, it’s always a good idea to check how much you’re saving each month, whether you’re investing tax-efficiently and if you’re on track for the retirement you want. By focusing on your goals and maintaining a long-term view, you can set yourself up for a positive financial future.

Please note that the tax rates and allowances mentioned in this article are based on information as of September 2024.

¹ These rates apply to taxpayers in England, Wales and Northern Ireland. For Scottish tax bands and rates see HMRC’s ‘Income Tax in Scotland’.

² For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual.

³ To work out if you have a reduced (tapered) annual allowance, see HMRC’s website. If you’ve flexibly accessed your pension, you can work out what your alternative annual allowance is here.

⁴ Carry forward does not apply to the money purchase annual allowance, as stated on HMRC's website. Consult a tax adviser if you have any questions.

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Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55, rising to the age of 57 in 2028.

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