Annual allowance

The annual allowance is basically a limit on the amount of money you can build up in your pension pot and still get tax relief on.

For a defined contribution scheme, like The People’s Pension, the limit applies to the money you contribute from your wages (plus any tax relief you receive), as well as the money your employer contributes during the tax year.

For a defined benefit scheme, such as a final salary scheme, the limit is not the amount you save. Instead, it applies against the value of the increase in your pension benefits (known as benefit accrual) over the tax year.

The standard limit is £60,000, but it may be lower depending on how much you earn. High earners may get a lower annual allowance (known as the tapered annual allowance), and if you earn less than £60,000, the tax relief you can get is based on how much you earn. The limit may also be lower if you’ve taken any money out of your pension savings already.

Note: Whether you have one pension pot or many, it’s still the same one annual allowance to cover all your pensions – except the State Pension.

You can only get tax relief on pension contributions up to however much you earn.

For example, if you earn £30,000, your employer could contribute £10,000, you could contribute £16,000 and you could get tax relief of £4,000.

You can still get tax relief however much you earn up to £3,600. Even if you don’t work all year, you can pay up to £2,880 into your pension (from savings or other payees perhaps) and still get tax relief. For most people, the tax relief would be £720 – adding up to £3,600.

If you’re a high earner, you might get a lower annual allowance, known as the tapered annual allowance.

From April 2023, the tapered annual allowance only affects those who meet both of the requirements shown below:

  • your ‘threshold income’ is above £200,000, and
  • your ‘adjusted income’ is above £260,000.

Working out your threshold and adjusted income can be complicated. You can see how it works and some examples on HMRC’s website.

HMRC tapered annual allowance guidance page »

In practice, the tapered annual allowance will mean that for every £2 of taxable income you earn 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.

Have you started taking money from your flexi-access drawdown account, or taken a flexible lump sum (which is described by HMRC as an ‘uncrystallised funds pension lump sum’)?

If so, the amount you can pay into defined contribution pension schemes, like The People’s Pension, reduces each tax year from then on. This reduced allowance is known as the money purchase annual allowance, and for the current tax year it is £10,000 – so you can only get tax relief on the first £10,000 you save into defined contribution pension pots. If you still have a defined benefit (such as a final salary scheme), then you may still be able to pay up to £36,000 into it each tax year.

Your pension provider will let you know if the money purchase annual allowance starts to apply to you. Then you’ll have 91 days from that notification to tell any other pension providers you’re with that you’ve flexibly accessed your pension pot, and when you did so.

It’s okay, you can go over the limit, you just won’t get tax relief on any contributions you pay that exceed the limit in that tax year.

The amount you’ve exceeded the annual allowance by will be added to the rest of your taxable income for the tax year and be subject to Income Tax at the rate(s) that apply to you.

Because people often have multiple pensions – and the annual allowance covers all your pensions with the one limit – HMRC can’t just take the tax in the normal way. So, you’ll get what’s known as an ‘annual allowance charge’.

It either gets taken out of your tax return, or you might be able to ask your pension provider to pay it out of your pension savings. This is known as ‘Scheme Pays’, which means your pension would be reduced. If you want to use this method to pay your annual allowance charge from The People’s Pension, the charge must be at least £2,000. There are also time limits on when Scheme Pays can be used, so it’s a good idea to act promptly once the tax year ends.

You might be able to ‘carry forward’ any unused annual allowance from the previous 3 tax years to either reduce your annual allowance charge or remove it completely – though this isn’t possible if you’ve previously taken income from flexi-access drawdown, taken a flexible lump sum, or if you haven’t been a member of a registered pension scheme in the last 3 years.

It’s up to you to check how much you’re saving into your pension pot(s). If you’re not sure whether you’re nearing your limit, HMRC has this handy tool you can use:

HMRC’s annual allowance calculator »

We’re not authorised to give you advice, but you can read more about your guidance and advice options on our website.