What’s the annual allowance?

The annual allowance is a limit to the total amount of contributions that can be paid into a defined contribution scheme (like The People’s Pension), as well as the total amount of benefits that you can build up in a defined benefit scheme, for tax relief purposes.

The amount you save into your pension pot can benefit from tax relief, as long as that amount doesn’t exceed the annual allowance in any tax year. If your taxable earnings in the year are below the annual allowance, then you can receive tax relief on 100% of your earnings (up to the annual allowance) or £3,600 gross –  whichever is higher.

The annual allowance limit for the current tax year is £60,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. It doesn’t include your State Pension. Contributions over this limit will result in a tax charge, known as the annual allowance charge.

If you have an income of over £260,000 in a tax year, then your annual allowance for that tax year will reduce on a tapered basis. For every £2 of adjusted income above £260,000, your annual allowance will reduce by £1. The maximum reduction is £50,000 so anyone with an income of £360,000 or more will have an annual allowance of £10,000.

The rules around the tapered annual allowance are complex and only a brief summary is provided here. Further information is available on HM Revenue & Customs website at: www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm057100

If you take flexible lump sums from your pension savings or start taking an income from flexi-access drawdown, you’ll be subject to a reduced money purchase annual allowance of £10,000 for future savings made into defined contribution pension schemes. Your pension provider will let you know if this applies to you. Within 91 days of this notification, you’ll have to tell any other pension providers you’re with that you’ve flexibly accessed your pension pot, and on what date you did so.

If you have to pay an annual allowance charge, you may be able to reduce the charge by using any leftover annual allowance from the 3 previous tax years – this is known as ‘carry forward’ (but this doesn’t apply to the money purchase annual allowance). You can also ask your pension provider to use some of your pension savings to pay the charge under the Scheme Pays rules.

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