Annual allowance

You can get tax relief on the money you save into your pension pot – as long as the amount of money you save isn’t above the annual allowance in any tax year.

The annual allowance doesn’t affect many people, though it might do if you’re saving a lot into your pension. It’s basically a limit on the amount of money you can save into your pension pot and still get tax relief on. (That amount of money includes the money you contribute from your wages, as well as the money your employer contributes and the tax relief you’ve gained so far.)

The standard limit is £40,000, but may be lower depending on how much you earn. High earners may get a lower annual allowance, and if you earn less than £40,000, the tax relief you can get is based on how much you earn. The limit also depends on whether 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, you could pay in £24,000 and get £6,000 in tax relief. (Though you may well have other things you want to spend that money on!)

You can still get tax relief however much you earn up to £3,600. Even if you don’t work all year, you may still be able to save up to £2,880 into your pension (from savings or other payees perhaps) and get 20% in tax relief – adding up to £3,600.

This might mean you get a lower annual allowance. Based on your adjusted income:

  • if you earn £150,000 or less this tax year, your annual allowance limit is £40,000
  • if you earn over £150,000 this tax year, your annual allowance will reduce on a tapered basis.

So for every £2 you earn above £150,000, your annual allowance will reduce by £1. The maximum reduction is £30,000 – so anyone with an income of £210,000 or more will have an annual allowance of £10,000.

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

If so, your annual allowance reduces to £4,000 each tax year from then on. So you can only get tax relief on the first £4,000 you save into a pension pot. This reduced money purchase annual allowance will only relate to you, if you have a defined contribution pension. It won’t affect final salary pensions.

Your pension provider will let you know if this applies 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 – there are a couple of solutions.

  1. One option is to ‘carry forward’ any leftover annual allowance you didn’t use in the past three years (though this isn’t possible if you’ve taken a
    flexible lump sum or income from flexi-access drawdown – or if you haven’t been a member of a registered pension scheme in the past three years).
  2. Or you just pay tax on the money that’s above the limit.

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 in your tax return, or if it’s over £2,000 you can ask your pension provider to pay it out of your pension savings.

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 have this handy tool you can use:

HMRC’s annual allowance calculator »

The People’s Pension isn’t a final salary pension (also known as a defined benefit pension), but if you do have one of these, the annual allowance applies to that too.

But rather than relating to how much money you’re saving, here the annual allowance applies to the increase in value to your benefits during the tax year – eg if you’ve had a pay rise and that increase in benefits has exceeded the annual allowance.

 

If you have a few pensions or if this is all getting confusing (because it is!) it might be worth talking to an independent financial adviser. Try Unbiased or the Money Advice Service.