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The annual allowance for pension savings

While there’s no limit on the amount that can be saved into your pensions each tax year, there is a limit on the total amount that can be saved each tax year with tax relief applying and before a tax charge might apply. The limit is currently £40,000. 

What is the annual allowance?

It is the limit on how much money you can build up tax-free in your pension in any one tax year while still benefiting from tax relief  

How pension savings are measured against the annual allowance depends on the type of pension scheme.

For defined contribution pensions, it's based on the total of:

  • your own contributions (plus any tax relief you receive)
  • any employer contributions, and
  • any contributions made on your behalf by someone else.

For defined benefit pensions, it's based on the capital value of the increase in your pension benefits over the tax year. You can ask your provider for this information.

The annual allowance is currently £40,000 for most people.

However, you can also only receive tax relief up to 100% of your earnings.

So if your earnings are lower than £40,000 you'll be entitled to tax relief only up to the amount you earn. If you earn less than £3,600, you can pay in up to £2,880 and still get tax relief.

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The annual allowance applies across all your pension savings, not per pension scheme. If you exceed it, a tax charge is made which claws back any tax relief that was given at source.

If you’re a high earner with an income above £200,000 a year, your annual allowance might gradually reduce to as low as £4,000 in the current tax year.

This is known as the tapered annual allowance.

If you've taken more than the amount you're entitled to take tax-free through flexible retirement income or as a lump sum, your annual allowance might also be £4,000.

This is known as the money purchase annual allowance.

It might also be possible  for more than your annual allowance to be saved into your pensions while still benefitting from tax relief by using unused annual allowance from up to the three previous tax years.

This is known as carry forward.

If you exceed the annual allowance

If you exceed the annual allowance in a particular tax year, you won’t get tax relief on any contributions you paid that exceed the limit in that tax year, and you will be faced with an annual allowance charge. 

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.

Or you might be able to ask your pension scheme to pay the charge from your pension. This is known as Scheme Pays and means your pension would be reduced.

This isn’t always possible, so you’ll need to check with your provider first. But there are times when they have to allow this.

Unless you’re subject to the money purchase annual allowance (MPAA), you might be able to use any unused annual allowance from the previous three tax years, to either reduce your annual allowance charge to a lower amount or remove it completely. This is known as carry forward.

Your pension provider or administrator should be able to give you your pension input amount for that scheme. This refers to the amount of contributions made if you’re in a defined contribution pension scheme or the capital value of the benefits you have built up if you’re in a defined benefit pension (including final salary and career average schemes).

If the total savings to one of your pensions exceed the standard or money purchase annual allowance (if you've triggered this) in a tax year, your provider must send you a pension savings statement with the details of this.

A financial adviser could help

If you think you might be getting close to your annual allowance, that it could be reduced or you might have exceeded it, consider getting advice from a regulated financial adviser.

They can help you understand how much your annual allowance is including any unused amounts, whether you've exceeded your annual allowance, if there may be options to reduce any potential charge and look at your options for paying any tax charge that may be due.

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