What Is the Maximum Pension Contribution?
When it comes to saving for the future, pensions remain one of the most tax-efficient ways to put money aside. If you're running a business or planning for your own retirement, it's essential to understand how the maximum pension contribution works and what it means for you.
The answer isn't always straightforward, as the rules depend on your income, how much you've already saved, and whether you're paying in personally or through your company.
Here's what you need to know:
Annual Allowance: The General Rule
In theory, there's no hard limit on how much you can pay into a pension. However, the annual allowance sets the maximum amount you can contribute each year while still benefiting from tax relief. For the 2025/26 tax year, this allowance is £60,000.
Anything over this can still be paid in, but it won't attract tax relief and may trigger an additional tax charge.
Linking Contributions to Your Earnings
There's an important caveat for personal contributions: you can only receive tax relief up to 100% of your annual earnings, or £60,000 (whichever is lower).
For example:
- If you earn £30,000 a year, the maximum personal pension contribution you can make while still receiving tax relief is £30,000.
- If you earn £80,000, you can contribute up to the £60,000 annual allowance and still receive full tax relief.
Employer contributions (including those made through your own limited company) aren't restricted by your earnings in the same way. However, they do need to pass the “wholly and exclusively” for business purposes rule to remain allowable.
The Carry Forward Rule
If you haven't used your full allowance in recent years, you may be able to contribute more and still qualify for tax relief by using the carry forward rule. This lets you utilise any unused allowance from the previous three tax years, provided you were a member of a registered pension scheme during that time.
The carry forward rule is particularly useful for business owners who want to make a larger one-off contribution in a profitable year.
Higher Earners and the Tapered Allowance
If your income exceeds certain thresholds, the amount of pension contribution that qualifies for tax relief may be reduced through the tapered annual allowance.
Currently, this tapered allowance affects individuals with:
- Threshold income over £200,000, and
- Adjusted income over £260,000.
If both apply, the annual allowance is reduced by £1 for every £2 of adjusted income over £260,000, down to a minimum allowance of £10,000. With such a drastic reduction in the annual allowance for higher earners, careful tax planning is essential to avoid unexpected tax bills.
The Lifetime Allowance (and Recent Changes)
Until April 2024, the lifetime allowance (LTA) capped the total amount you could build up in pensions without additional tax charges. This limit has now been abolished, offering more flexibility for savers.
However, the limit on how much you can take as a tax-free lump sum still applies. For most people, that's 25% of your pension savings, up to a maximum of £268,275. Anything above this can still be drawn, but it will be taxed as income at your marginal rate.
Pension Contributions for Business Owners
If you run your own company, pensions can be an especially tax-efficient way to extract profits. Employer contributions:
- Count as an allowable business expense (reducing Corporation Tax).
- Don't attract National Insurance in the same way as salary.
- Provide you with long-term retirement savings.
The key is to balance contributions with cashflow and ensure they remain justifiable as a legitimate business expense.
Final thoughts
While the maximum pension contribution isn't capped in absolute terms, the annual allowance of £60,000 (plus any unused allowance carried forward) sets the limit for tax-efficient saving. Above this, the benefits reduce, and extra charges may apply.
If you're a business owner, employer contributions remain a valuable way to extract profits tax-efficiently, though rules such as tapering and tax-free cash limits mean it's worth mapping out contributions in advance.
If you'd like tailored advice on making the most of pension contributions, we offer expert tax advice and planning services for businesses and individuals delivered by our experienced chartered accountants. Please get in touch to find out more.