Up to £60,000 a year can currently be saved into a pension without paying tax. This is called the annual allowance and it resets at the start of each tax year. Here’s what you need to know.
What is the annual allowance?
The annual allowance is the amount that can be paid into a pension each tax year, without paying tax. This applies across all your pension savings, not per pension scheme.
For defined contribution pensions, the annual allowance counts:
your contributions (plus any tax relief added to your pension)
any employer contributions, and
any contributions made on your behalf by someone else.
For defined benefit pensions, the annual allowance counts how much your pension has increased in value over the tax year.
The annual allowance is £60,000
For most people, the annual allowance is currently £60,000. You might also be able use unused annual allowance from the past three tax years to save more in this tax year. This is known as Carry forward.
If you earn less than £3,600 a year, you won’t pay tax on pension savings up to £2,880. See our guide Tax relief and your pension for more information.
If you’re a high earner with an income above £200,000 a year, your annual allowance might gradually reduce to £10,000 in the current tax year. This is known as the Tapered annual allowance.
If you've taken taxable money from your pension, through flexible retirement income or as a lump sum, your annual allowance might also be reduced to £10,000. This is known as the Money Purchase Annual Allowance (MPAA).
You’ll pay tax if you go over the annual allowance
You can contribute more than the annual allowance, but you’ll pay tax.
Any amount you go over the annual allowance by will be added to the rest of your taxable income for the tax year. This means you’ll pay Income Tax on it, at the rate(s) that apply to you.
Alternatively, you can ask if your pension scheme can pay the charge from your pension. This is known as Scheme Pays and means your pension would be reduced.
A financial adviser could help
If you think you might be affected by the annual allowance, 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
your options to reduce the amount of tax you’ll pay
- the best ways to pay any tax charge that’s due.
Find out more in our guide Choosing a regulated financial adviser.