- What is a maximum annual pension contribution (annual allowance)?
- Money purchase annual allowance.
- How is tax relief claimed?
- Pension contribution cap for high earners (tapered allowance).
- What is carry forward?
- What is the lifetime allowance for UK pensions?
There’s no limit to the amount of money you can add to your pension pot each tax year. But there is a cap on the amount of money you can save that is tax-free. The cap applies to a person rather than to an individual pension; so if you’re contributing to more than one pension fund, the tax-free limit applies to the total sum of money over all pensions.
Contributions to pensions attract tax relief. However, the maximum that can be contributed that will qualify for tax relief is the greater of £3,600 gross, or 100% of your earnings p.a. There is also an annual allowance which is currently £60,000. If contributions exceed the annual allowance there will be a tax charge payable. This figure includes contributions from:
- The pension holder’s net earnings.
- Tax relief from the Government.
- Employer contributions.
If the maximum limit is exceeded, tax is due on the excessive portion of contributions. For example, if a sum of £70,000 was paid into a pension fund over the course of one year, tax would be payable on £10,000.
From the age of 55, a pension holder has the option of withdrawing up to 25% of their pension fund as a tax-free lump sum. Withdrawals over the 25% tax-free amount are subject to income tax and may trigger the money purchase annual allowance (MPAA), which permanently reduces the annual allowance. In the present tax year, the MPAA is £10,000.
In a workplace pension scheme there are two ways in which tax relief contributions are added to the pension fund.
- The employer submits an employee’s pension contribution from their gross earnings (before tax is paid).
- The employee then pays any tax due on the remainder of their earnings.
Relief at source
- The employer submits an employee’s contribution from their net earnings (after tax is paid).
- The pension provider claims back the tax at the basic rate from HMRC on the employee’s behalf and adds it to the pension pot.
Further tax relief can be claimed for contributions up to the amount the higher rate (or additional rate) of tax has been paid. This is done via a Self-Assessment tax return.
In the case of a private pension, contributions are always on a relief-at-source basis.
Read more: Employers guide to salary sacrifice pensions
The annual allowance is reduced on a tapered basis for high earners who meet both these criteria:
- Adjusted income is above the current threshold (currently £240,000). Adjusted income includes all pension contributions.
- Threshold income is above the current threshold (currently £200,000). Threshold income excludes pension contributions.
For every £2 above the adjusted income threshold, £1 is deducted from the basic £60,000 annual allowance. For example, if someone’s adjusted income is £15,000 above the threshold, their annual allowance would be reduced to £52,5000.
If you contributed less than the annual allowance in any of the previous three years, unused annual allowance can be carried forward. To use carry forward there are certain conditions to be met:
- You must have been a member of a UK-registered pension scheme for at least three years even if you haven’t paid in any money.
- In the tax year that you want to use the carry forward, all annual allowance must be used up.
- Your contribution must not exceed your income for the tax year in which you’re making the contribution. This only applies to your personal contribution and not your employer’s.
- If you’re subject to a tapered allowance, unused tax relief must be measured against your tapered allowance in the relevant year.
Up until 5th April 2024 there is a limit on the amount of pension benefit that can be drawn from pension schemes – whether as a lump sum or retirement income. This Lifetime Allowance (LTA) is tested each time you access a pension benefit, with a final test carried out at age 75 (against both your drawn and undrawn benefits).
Up until 5th April 2023, if the value of all of your pension benefits, across all schemes, exceeded the LTA, any excess would have had a tax charge of 25% if it was withdrawn as an income (for example from an annuity or a drawdown arrangement) or 55% if it was withdrawn as a cash lump sum.
The March 2023 Budget confirmed that the LTA excess tax charge would not be applied in the 2023/24 tax year, and the LTA itself will be abolished on 5th April 2024.
For expert advice on investments and pensions, call Alan Boswell Financial Planners on 01603 967967.
Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances and the laws concerning these can change.