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.
It's not the maximum pension contributions you can make. You could still make more. But you wouldn't get tax relief on contributions over the annual allowance.
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.