Why February Matters for Your Pension Planning: Making the Most of Your 2025/26 Allowances

February marks a critical point in the tax year. With just over two months remaining until 5th of April, you have a narrow window to optimise your pension position before allowances reset. For those approaching retirement, strategic action now could enhance your eventual retirement income by tens of thousands of pounds.

This is not theoretical. The mathematics of pension tax relief, combined with carry forward rules and the approaching State Pension increase, create specific opportunities that expire on 5 April 2026.

Understanding What Changed in April 2025

The pension landscape shifted significantly over the past year. The lifetime allowance, which previously capped total pension savings at £1,073,100, was abolished in April 2024. This removed a significant barrier for high earners and those with substantial pension pots.

However, the abolition was not complete deregulation. New limits were introduced:

The Lump Sum Allowance caps tax-free cash at £268,275 (previously 25% of the lifetime allowance). Any lump sum above this amount incurs income tax at your marginal rate.

The annual allowance remains at £60,000 for 2025/26. This is the maximum you can contribute across all pensions whilst receiving full tax relief. Exceed this, and you face a tax charge that effectively removes the relief you received.

For context, the annual allowance stood at £255,000 in 2010/11 before successive reductions. The current £60,000 allowance represents a substantial opportunity, particularly for higher-rate taxpayers.

State Pension Increase: What It Means for Your Planning

From 6 April 2026, the full new State Pension increases to £241.30 weekly (£12,548 annually), up 4.8% from the current £230.25. This represents the largest cash increase in State Pension history at £574 annually.

The basic State Pension (for those who reached State Pension age before April 2016) rises to £184.90 weekly (£9,615 annually).

Whilst this increase is significant, context matters. The Retirement Living Standards, produced by the Pensions and Lifetime Savings Association, estimate that a comfortable retirement for a single person requires £43,100 annually. The State Pension covers less than 30% of this amount.

Additionally, State Pension age is rising. From 6 May 2026, it begins increasing from 66 to 67, reaching 67 by 6 March 2028. If you were born between 6 April 1960 and 5 April 1977, this affects you directly.

The combination of delayed access and modest income reinforces the critical importance of private pension provision.

The Tax Relief Advantage: Why Timing Matters

Pension contributions receive tax relief at your marginal rate. For a higher-rate taxpayer, a £10,000 contribution effectively costs £6,000 after tax relief. For an additional-rate taxpayer, it costs £5,500.

This is not a future benefit. The relief is immediate, reducing your tax liability for 2025/26.

For business owners and directors, employer pension contributions provide even greater efficiency. Contributions made from company profits before corporation tax avoid both income tax and National Insurance whilst providing full pension tax relief.

Consider a director with £100,000 in retained profits. Taking this as salary or dividends incurs substantial tax. An employer pension contribution of £100,000 avoids corporation tax (19%), income tax (40% or 45%), and National Insurance, whilst the pension receives the full £100,000.

The effective tax saving can exceed 60% compared to extracting equivalent funds personally.

Using Carry Forward Before It Expires

Carry forward allows you to use unused annual allowances from the previous three tax years. This creates the potential for contributions exceeding £60,000 whilst still receiving full tax relief.

However, unused allowances from 2022/23 expire on 5 April 2026. If you did not maximise your allowance that year, those unused amounts disappear permanently unless used before the tax year end.

For high earners with fluctuating income, carry forward enables strategic pension funding during profitable years whilst maintaining tax efficiency.

The calculation requires careful analysis of your pension input amounts for each of the previous three years, but the potential benefit can be substantial.

High Earners: The Tapered Annual Allowance Trap

If your threshold income exceeds £200,000 and your adjusted income exceeds £260,000, your annual allowance reduces by £1 for every £2 of adjusted income over £260,000, potentially down to £10,000.

Threshold income is broadly your total taxable income minus personal pension contributions. Adjusted income adds employer pension contributions back.

This creates complexity for high earners. A £280,000 adjusted income reduces your annual allowance from £60,000 to £50,000. An adjusted income of £360,000 or above reduces it to the minimum £10,000.

Exceeding your tapered allowance triggers an annual allowance tax charge. The excess faces income tax at your marginal rate, effectively removing the tax relief received.

Strategic planning around bonus timing, salary sacrifice arrangements, and pension contribution phasing can mitigate these charges, but requires analysis specific to your circumstances.

The Money Purchase Annual Allowance: A Permanent Restriction

If you have accessed pension funds flexibly (withdrawing more than your 25% tax-free lump sum), the Money Purchase Annual Allowance restricts future defined contribution pension savings to £10,000 annually.

This is not temporary. Once triggered, it applies permanently.

For those planning phased retirement, continuing to earn whilst drawing pension, or using flexible access to supplement income before State Pension age, understanding this restriction is essential.

The MPAA does not prevent contributions exceeding £10,000, but you receive no tax relief on the excess and face a tax charge on amounts above the limit.

February Action Points

If you have not reviewed your pension position for 2025/26, February presents your final practical opportunity before year-end:

• Review your pension input amount for 2025/26 to date. Have you maximised your £60,000 allowance, or are unused amounts available?

• Calculate available carry forward from 2022/23, 2023/24, and 2024/25. Unused allowances from 2022/23 expire in two months.

• Assess tapered annual allowance impact if you are a high earner. Does your adjusted income trigger tapering, and if so, what is your reduced allowance?

• Consider ISA allowances alongside pensions. The £20,000 ISA allowance also resets on 6 April, providing additional tax-efficient savings capacity.

• Review existing pension investments. Are funds appropriate for your timeline and risk tolerance? Are charges competitive?

• If you are a business owner, evaluate whether employer pension contributions from company profits before year-end provide greater tax efficiency than alternative profit extraction methods.

• Understand the interaction between pension contributions and other allowances. Strategic contributions can reduce adjusted net income, potentially restoring personal allowance (lost above £100,000 income) or maintaining child benefit eligibility.

  
  

Final Considerations

Pension planning is not an annual task completed in the final weeks before tax year-end. However, the reset of allowances on 6 April creates specific opportunities and deadlines that warrant attention.

The combination of substantial tax relief, carry forward rules expiring, and the narrow window before year-end makes February the critical month for pension optimisation.

If you are uncertain whether you are maximising available allowances, or if your circumstances have changed significantly during 2025/26, an objective review of your position can identify specific opportunities before they expire.

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