06 MAY 2026

Technical Newsletter - May 2026

Issue 12 - May 2026

 

Welcome to Issue 12 of our newsletter.

 

A quiet start to a new tax year - the calm before the storm?

Compared with recent years the new tax year has started in the pension world pretty much as it left off. No reliefs or allowances have changed. The annual allowance remains at £60,000 (or £10,000 for members flexibly accessing their pensions by taking UFPLS or income drawdown payments and those higher earners who have exceeded the upper limit of the tapering threshold). The Lump Sum and Death Benefit Allowance (LSDBA) remains at £1,073,100 and the Lump Sum Allowance (LSA) at £268,275.

 

Contributions, what a relief! The basics.

Sometimes the rules which govern the maximum contribution levels payable can seem complex. This is probably not helped by the fact that there are two distinct limits which need careful consideration when maxing out contribution levels.

The first limit is simply the maximum amount that can be paid into a pension before a tax charge applies. This is known as the annual allowance and is £60,000 for tax year 2026-27 as mentioned earlier. This £60,000 includes both personal and employer contributions and all contributions which are paid into any private or company pension scheme.

The second limit is maximum “relievable” contribution that someone can make. For personal contributions tax relief is payable when someone is a UK resident for tax purposes either in the current tax year, or at some time in the previous five tax years if they were a member of the scheme, they are making the contribution to. The maximum relievable amount here is the lower of the individual’s net relevant earnings or £60,000. This basically is earned income (including bonuses), so things like dividend income and savings income are not counted. If you are an employee and your salary for 2026-27 is £40,000 and your bonus is £5,000, then you can make a contribution of £45,000.

 

What about employers?
For employers, tax relief is available to them in the form of a corporation tax deduction and the maximum contribution they make is NOT linked to the earnings of their employee. So, theoretically they could pay £60,000 into the pension of an employee earning £30,000 a year. However, for the contribution to be acceptable to HMRC, it must pass the “wholly and exclusively” test, meaning the expense must be entirely and solely for the purpose and trade of the profession.

 

What can be carried forwards?
A further feature is the availability of “carry forward” relief. This means that if someone has not used up their full £60,000 contribution entitlement in a tax year, that unused amount can be carried forward a maximum of three tax years to allow a bigger contribution to be made, more than the annual allowance for example. The caveat here is that for tax relief to be payable, for personal contributions the individual must have net relevant earnings at least equal to the contribution proposed in the tax year the contribution is paid. The individual must also have been a member of a ‘relevant pension scheme’ in each of the years from which they wish to carry forward unused allowances.

For example, Tim earned £120,000 in tax year 2025-26, helped by a large bonus. He had unused relief totalling £60,000 for tax years 2022-23, 2023-24 and 2024-25. This means he can add that £60,000 to his £60,000 annual allowance for 2025-26 and make a personal contribution equal to his £120,000 earnings for that year.

 

Can non-UK based residents contribute?
For non-UK based residents, they too can make personal contributions to UK pension schemes. In some circumstances these might even benefit from basic rate tax relief – for those leaving the UK, a gross contribution of £3,600 per annum can be made for up to 5 tax years and benefit from relief at source.

Other than this small allowance however non-UK based residents will not normally receive tax relief, so careful consideration is needed by advisers here. Your client will not receive tax relief when the money goes into the pension, but by the time it is drawn out as income in retirement, they might have moved back to the UK again and therefore be liable for income tax on their income drawdown payments.

 

 

Salary Sacrifice - use it before you lose it!

With the personal allowances frozen until what seems like the end of time, more and more individuals are being pulled into the 40% or 45% tax brackets. Once upon a time £50,270 was a fairly decent annual income, but these days more people in the lower middle-class bracket are being pulled into the 40% tax bracket.

The 60% tax trap which results when income pushes above £100,000 in the UK (England, Wales and Northern Ireland, not Scotland) is another area that needs careful navigation.

For those just above these thresholds a salary sacrifice contribution is a useful tool for reducing your tax bill. The Government announced in their 2025 autumn budget that from 2029 they were capping the salary sacrifice limit to £2,000 per annum. Above this level, employees and employers will pay National Insurance on salary sacrifice pension contributions. The income tax saving is still available, meaning salary sacrifice will still make life easier for higher and additional rate taxpayers (instead of having to manually reclaim additional reliefs above basic rate), but for employers it makes a contribution more expensive. For this reason, it is definitely worth using salary sacrifice schemes during this tax year and the next two tax years whilst the full benefit remains available uncapped.

 

 

“What’s that coming over the hill? Is it a monster?” Yes, the IHT monster in 2027

As the pension schemes bill makes its way through parliament, it seems unlikely that the Government are going to U turn on a particularly controversial change to the pension relief system which is now less than 12 months away. From 6 April 2027, discretionary pension schemes (in other words nearly all the pensions taken up by self-employed or private sector workers) will fall within the remit of inheritance tax for the first time.

This is going to be a major change which will bring the estates of many thousands of people within the reach of inheritance tax when they die. In the southeast of the UK for example, you only need an average four-bedroom house and a half million-pound pension pot to reach the threshold at which IHT at 40% commences.

For UK residents passing on their primary residence to direct descendants, who have full unused nil rate bands and two residential nil rate bands, theoretically £1,000,000 can be passed onto beneficiaries before IHT kicks in.

A few common misconceptions about IHT

Tapered relief

Most people have heard of tapered relief in connection with lifetime giving. For example, if you make a gift and then pass away 4 years later, the gift remains in your estate when you die, but IHT is not payable at 40%. The IHT rate “tapers away” by 20% for each year you survive beyond year 3, up to 7 years – meaning the longer the time between the gift and the donor’s death, the less tax is charged. No tax is levied on gifts that took place more than 7 years prior to death.

What is perhaps less known is that this tapering only comes into effect when your gift means you exceed your remaining nil rate band. So, for example, if you have not made any previous lifetime gifts and make a gift of £50,000, if you die 5 years after making that gift there is no tapering. The £50,000 would be deducted in full from your £325,000 nil rate band.

For example, Martin gifted his son £200,000 in May 2017. Sadly, he passed away in June 2022. He survived five full years after making the gift, but because his gift was below his nil rate band of £325,000 and he had made no previous gifts, tapering did not apply. His nil rate band was reduced by the full £200,000 because he failed to survive seven years after making the gift.

 

Gifts from regular income

This is a most commonly unused relief available to everyone. You can give away regular amounts to your beneficiaries without using the normal £3,000 exemption, provided that the amount given away does not impact your standard of living. This is the important part. If you give money away and then have to borrow from family for items such as food and fuel, HMRC will notice this and could try and claw this money back for IHT when you die. It is however an important and powerful IHT mitigation tool if used carefully.

A good idea if regularly giving to a beneficiary is to set up a direct debit or standing order and keep good records so that it can be proved that it is a legitimate and affordable gift from your regular income.

Used with a flexible reversionary trust, it is also possible to give money away but still have access to it later. We expect these arrangements to start being used in connection with private pensions in the coming years.

 

Can you give away your home to save on IHT?

Your home is likely to be your main asset so why not give it away to your children, but carry on living in it until you die? This sounds like a great idea, but unfortunately HMRC are wise to such arrangements and if you give away your home and carry on living in it, your beneficiaries will in time be caught by the “gifts with reservation” rules. In other words, the house you have given away would still be considered part of your estate when you died.

If you want to gift your house to your children, you must pay full market rent if you intend on still living in the property. This might make the arrangement financially unviable

 

Conclusions

It might seem like a quiet period in the world of pensions but there is still much to think about due to changes coming down the track. For advisers, your role is key in planning ahead with your clients. A pension is still a powerful tax effective tool, but from April 2027 onwards the decumulation part of the process will need careful thought and planning if your client’s beneficiaries are to avoid a nasty tax surprise in years to come. We hope that this month’s issue has provided some useful food for thought.

 

IMPORTANT NOTE Please note that any information provided is not financial advice. IFGL Pensions is not authorised to provide financial advice, or taxation advice. This information is based on our understanding of current regulations and requirements.