4 smart ways to grow your pension pot tax-efficiently

As you grow your pension pot, it’s important to make the most of your contributions.

Defined contribution (DC) pension schemes offer multiple tax-efficient benefits to help boost your contributions and grow your retirement savings. This can enable you to grow your pot more quickly, without necessarily contributing more.

By taking advantage of these opportunities, you could help build the funds you need to achieve your retirement goals.

Read on to discover four ways you could grow your pension tax-efficiently and make your money work harder for you.

 

1. Claim your full tax-relief entitlement

In most cases, tax relief is applied automatically at the basic rate of 20%. The relief is usually added directly to your pension pot.

If you pay Income Tax at the higher or additional rate, you may be able to claim a further 20% or 25%, respectively. This can often be done through your employer, directly with HMRC, or via Self Assessment.

So, once you factor in tax relief, you could boost your pension pot by £1,000 by contributing:

• £800 for a basic-rate taxpayer
• £600 for a higher-rate taxpayer*
• £550 for an additional-rate taxpayer*.

*Assuming at least £1,000 of income is in the relevant tax band.

If you haven’t claimed your higher- or additional-rate tax relief over recent years, you may be able to backdate your claim by up to four previous tax years. Tax relief beyond the basic rate of 20% is usually paid as a reduction to your tax bill, rather than being added directly to your pension pot.

By claiming your full tax relief entitlement, you could grow your pot significantly.

 

2. Know your tax-efficient allowance for pension contributions

You can usually only claim tax relief on your own contributions up to the value of your annual earnings.

What’s more, contributions over the Annual Allowance are usually subject to a tax charge, meaning they are not tax-efficient in the same way. As of 2026/27, the Annual Allowance is £60,000 and covers pension funding from all sources, including your employer if applicable. If you have unused Annual Allowance from the last three tax years, you may be able to use this to increase your overall Annual Allowance in the current tax year.

However, you may have a lower allowance if you withdraw cash (other than your tax-free cash) from your pension. This can trigger the Money Purchase Annual Allowance (MPAA), permanently reducing your tax-efficient limit to £10,000 a year.

You may have a tapered Annual Allowance if your threshold income exceeds £200,000 a year and your adjusted income is over £260,000. Depending on your earnings, this taper could reduce your allowance to as low as £10,000 a year.

When boosting your pension with tax-efficient contributions, it’s important to understand how much allowance you have available to avoid exceeding your limit. If you’re unsure, we can help you calculate how much you can pay in a year while benefiting from tax relief.

 

3. Reduce your National Insurance contributions with salary sacrifice

Paying into your workplace pension via a salary sacrifice scheme could grow your pot by lowering the amount you pay in National Insurance (NI).

These schemes reduce your taxable income in exchange for pension contributions. As such, they could lower your National Insurance contributions (NICs), with the savings added directly to your pension or used to increase your take-home pay, depending on the structure.

In 2026/27, you can generally receive NI relief on all pension contributions made via salary sacrifice, provided your employer offers a salary sacrifice scheme (you can’t sacrifice salary that would bring your earnings below minimum wage). However, from April 2029, the NI exemption will only be available for contributions up to £2,000 a year.

 

4. Earn investment returns tax-efficiently

Not only can pension contributions help mitigate your tax bills, but your fund’s growth is typically tax-efficient, too.

Returns are typically exempt from Income Tax and Capital Gains Tax, and the full amount gained is generally reinvested, which can lead to accelerated growth through compound returns.

As such, paying into your pension could offer a more tax-efficient way to grow wealth for the long term than investing through a general investment account (GIA). It’s worth noting that there is usually no Capital Gains Tax (CGT) to pay on gains made within an authorised unit trust or open-ended investment company fund, although you could be liable when you sell your shares. Dividends are also generally free of CGT, although you may be liable when selling shares.

It’s important to remember that pensions are not normally accessible until 55 (57 from April 2028). Investing in a pension, rather than a GIA or ISA, might therefore not be suitable in all circumstances.

 

Plan your contributions to align with your retirement goals

This said, it’s not always wise to pay as much as possible into your pension. While you want to grow a large enough fund to enjoy a comfortable retirement and achieve your goals, paying in too much could trigger a significant tax bill after you pass away.

In 2026/27, most pensions are exempt from Inheritance Tax (IHT). This means you can leave an unused pension pot to a loved one without it being subject to IHT.

However, from April 2027, any funds remaining in your pension when you die could be included in your estate for IHT purposes. Depending on the size of your estate, this could mean 40% of your unused pension pot will go to HMRC, leaving just 60% for your chosen beneficiary.

What’s more, your beneficiary will typically pay Income Tax when they access the funds if you die after age 75. Depending on their marginal rate and the amount they draw down, your pension funds could be subject to a further 20%, 40%, or 45% tax before they reach your loved one.

So, it’s important to carefully plan your pension contributions to ensure you’re saving enough to achieve your retirement goals, while factoring in the new IHT pension rules and the legacy you intend to leave.

We can help you calculate how much you might need in retirement, how much you need to contribute, and how far those contributions could grow with tax relief and investment returns.

 

Get in touch

To discuss how we could help you create a tax-efficient retirement plan tailored to your needs, goals, and financial circumstances, get in touch.

Email info@chancellorfinancial.co.uk or call 01204 526 846 to speak to an adviser.

 

Please note

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

All information is correct at the time of writing and is subject to change in the future.

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.

The Financial Conduct Authority does not regulate tax planning or estate planning.

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 Pensions Regulator.