The years before you stop work are the most tax-efficient years to pay into a pension. Here's how the underused tools actually work, and what to consider before using them.
May 2026 : 9 min read - Part of the My Anti-Panic Retirement Toolkit series at FreeBefore65.
In my final year of work, I stumbled across an option I hadn't been aware existed. The combination of salary sacrifice, AVCs, and the three-year carry-forward on the annual pension allowance creates a window for substantial late-career contributions. I'd been working in roles with pension provision for decades and never had it explained to me clearly. I came across it almost by accident, in the year I needed it. The conversations that followed changed what I did in the run-up to retirement substantially.
This post is about two of the most underused tools available to anyone approaching the decision to leave work: salary sacrifice and Additional Voluntary Contributions (AVCs). Both have been around for years. Both can amplify pension savings significantly in the final years of a career. Most readers I've spoken to don't know they exist or have a vague sense of them but haven't done the maths. I include myself in that group until the final stretch.
How salary sacrifice works
Salary sacrifice is an arrangement where you agree to reduce your gross salary in exchange for your employer paying the same amount into your pension. Crucially, both the employee and the employer save National Insurance on the sacrificed portion.
Take a worked example. Someone earning £50,000 a year who wants to put £5,000 more into their pension has two routes.
The standard route: they receive £5,000 as gross salary. They pay 20% income tax (£1,000) and 8% NI (£400), leaving £3,600 net. They then add £3,600 to their pension. The pension provider claims 20% basic rate tax relief, bringing the contribution to £4,500.
The salary sacrifice route: they agree to receive £5,000 less salary. The employer puts that £5,000 directly into the pension. No income tax, no employee NI, no employer NI on that portion. The full £5,000 lands in the pension. The employer's NI saving (around 15% of £5,000, so £750) is often shared with the employee, either as a higher contribution or as a small reduction in the sacrifice.
The salary sacrifice route is roughly 10-15% more efficient than the standard route.
For higher-rate taxpayers the gap widens further, because the standard route requires reclaiming the additional 20% relief through self-assessment, which many people don't do or do incompletely.
Now take a higher-rate taxpayer. Someone earning £80,000 a year who wants to put £5,000 more into their pension.
The standard route: they receive £5,000 as gross salary above the higher-rate threshold. They pay 40% income tax (£2,000) and 2% NI (£100), leaving £2,900 net. They add £2,900 to their pension. The provider claims 20% basic-rate relief at source, bringing the contribution to £3,625. The additional 20% higher-rate relief has to be reclaimed through self-assessment, arriving later as a £725 tax refund rather than going into the pension.
The salary sacrifice route: they agree to receive £5,000 less salary. The employer puts the full £5,000 directly into the pension. No income tax, no employee NI. The full £5,000 lands in the pension, plus any shared employer NI saving (around 15% of £5,000, so £750).
The gap is bigger at higher rate. The standard route gets £3,625 into the pension; salary sacrifice gets £5,000, or £5,750 with shared employer NI. The standard route does also return £725 to the taxpayer as a tax refund, but only if the higher-rate relief is actively claimed through self-assessment. HMRC has long flagged unclaimed higher-rate pension relief as a persistent issue. If the relief isn't reclaimed, the standard route is significantly worse than salary sacrifice rather than modestly worse.
AVCs: the workplace pension top-up
Additional Voluntary Contributions are top-up pension contributions made through your workplace scheme, over and above the standard contributions. The way they work depends on what kind of underlying pension you have.
- For DC (Defined Contribution) schemes, AVCs are typically additional contributions to the same scheme. They sit in your main pot, are usually deducted from gross salary via payroll, and tax relief is applied at source. This was the route in my case, and it's the most common arrangement for current workplace schemes.
- For DB (Defined Benefit) schemes, AVCs are usually held as a separate DC sub-pot alongside the main DB benefits. The notable feature here is that this DC AVC pot can sometimes be taken entirely as part of the 25% tax-free lump sum when you access the main scheme, which can be a very tax-efficient way to extract that cash. It depends on your scheme's specific rules.
In both cases, the marginal-rate relief and the carry-forward advantage apply equally. AVCs are useful in the final years of a career for the same reason salary sacrifice is. The marginal tax rate is typically at its highest, so the relief is maximised, and the contribution can compound for a few more years before access.
The administrative simplicity matters too. Workplace AVCs are usually deducted from gross salary at source, with tax relief applied automatically. No self-assessment claim is needed for basic rate, and higher-rate relief is usually applied through PAYE rather than requiring a separate claim.
The annual allowance and the three-year carry-forward
Both salary sacrifice and AVCs sit inside the pension annual allowance, which is currently £60,000 a year. That's the maximum total pension contribution from all sources (employee, employer, salary sacrifice, AVCs, personal pension) that can be made in a tax year while still receiving tax relief.
The detail most people don't realise is that unused annual allowance can be carried forward from the previous three tax years. Add them together and someone with limited recent contributions can, in principle, make a contribution of up to £240,000 in a single year (£60,000 current year plus £60,000 from each of the previous three years).
This is the lever that makes the final years particularly powerful. Someone who has been contributing at the auto-enrolment minimum for several years has substantial unused allowance available. A redundancy payment, an inheritance, a significant bonus, or a deliberate decision to sacrifice salary aggressively can be channelled through carry-forward without exceeding the allowance.
A few rules to know. You must have been a member of a registered pension scheme in each of the carry-forward years. The current year's allowance is used first. Your earned income in the year of contribution must cover the contribution amount, with limited exceptions. And once you've started accessing pension funds flexibly, the Money Purchase Annual Allowance kicks in and caps future contributions at £10,000 a year.
My own use of these tools
My employer offered AVCs through the workplace DC scheme. Once I understood what was possible, I was fortunate enough to be in a position where I could sacrifice a substantial portion of my final-year salary into the pension, living off accumulated savings to bridge the income gap that created.
What made that possible wasn't ingenuity. It was circumstance, and partly luck. I'd accumulated savings over the years that could absorb a year of reduced take-home pay. I was at the higher end of marginal tax rates, which maximised the relief. My employer offered the scheme structures that made this work. And I happened to find out in time. Many readers won't have all four of those conditions, and the lever doesn't have to be pulled to its maximum to be useful.
To give a sense of how much the lever can move things, my taxable income in that final year dropped below the personal allowance. I went from being a higher-rate taxpayer to paying almost no income tax. That's an extreme outcome, available only because all four of the conditions above stacked together in the same window. It's not a target. It's a marker for how aggressive the lever can be when the circumstances permit.
What I'd say with hindsight is that I should have understood this earlier. Five years before I left, not two. The carry-forward allowance creates a window of meaningful size, but you only see it once you go looking for it. I didn't go looking. I tripped over it.
Pros and cons
- Pros worth naming clearly.
These are the most tax-efficient pension contributions you'll ever make. The combination of high marginal rate relief, employer NI saving, and short time to access creates a return profile that's hard to match anywhere else.
The carry-forward window gives flexibility. You don't have to commit to high contributions years in advance. You can make a single large contribution in the final year, using accumulated unused allowance, provided you have the earned income to cover it.
The administrative friction is usually low. Salary sacrifice is automated through payroll. Workplace AVCs are deducted at source. No separate claims, no self-assessment headache for basic rate.
- Cons worth taking seriously.
Salary sacrifice reduces your gross salary, which can affect things tied to gross figures. Mortgage applications during the sacrifice period. Statutory redundancy pay if you're made redundant. Life cover that's calculated as a multiple of salary. Statutory maternity, paternity, or adoption pay. Worth checking what depends on gross salary before sacrificing aggressively.
You can't undo a contribution. Money that goes into the pension is locked there until pension access age, currently 55, rising to 57 from April 2028. If your circumstances change before then, that money isn't available.
The Money Purchase Annual Allowance kicks in once you start flexibly accessing pension funds. From that point, future contributions are capped at £10,000 a year. Worth knowing if there's any chance you'll want to keep contributing after starting drawdown.
Aggressive sacrifice requires accumulated savings to absorb the income gap. This is the prerequisite that limits who can use these tools at the higher end. Without savings to bridge the reduced take-home period, the aggressive end of the lever isn't available.
Some employers don't offer salary sacrifice or AVCs. Smaller employers, certain public sector arrangements, and umbrella company arrangements may not have these structures in place. Self-employed readers can use personal pension contributions, but salary sacrifice in the employer sense isn't available.
What to actually do
If you're within five years of stopping work and you haven't had the conversation, it's worth having it now.
Talk to your pension administrator. Ask specifically about salary sacrifice, AVCs, and the rules of your workplace scheme. Some schemes have specific quirks worth knowing, particularly around how AVCs interact with the tax-free lump sum on retirement.
Get a personalised statement of your unused annual allowance from the previous three years. HMRC can provide this if your pension scheme can't.
Model what you could afford to sacrifice. The starting point is "what's my actual living cost from net salary, and what could I cover from savings or other income if I sacrificed more aggressively." That tells you what the lever's range looks like for you specifically.
The IFA conversation is worth having for anyone in the higher-allowance carry-forward territory. The interaction between the lump sum allowance, the lifetime allowance changes, and the rules of specific workplace schemes is complex enough that regulated advice usually pays for itself.
What I'd take from this
The headline isn't "do what I did." Most readers won't have the same combination of circumstances. The headline is that the final-years window exists, the tools are real, and most people approaching the retirement decision haven't done the maths on what's possible.
If even a moderate version of this is available to you, it can shift the eventual pension pot more than you might expect. The five years before leaving are the highest-marginal-rate years of most careers. Putting money in then, with employer NI savings, carry-forward allowance, and a shortened compound horizon that still has meaningful runway, is a lever that doesn't reopen once you've stopped.
If I had my time again, I'd ask my pension administrator the questions five years before leaving rather than finding the answer by accident in the final year.
Part of the My Anti-Panic Retirement Toolkit series at FreeBefore65.
Tony writes about his personal journey to early retirement at freebefore65.co.uk. He is not a financial adviser. All content reflects his own experience and research and should be taken as a starting point for your own thinking, not as professional advice.
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