The annual allowance with regard to pensions is the amount that can be paid into a pension each financial tax year.
This will apply across all your pension schemes that you may have. It doesn’t relate to each pension scheme that you may have.
So what counts towards your annual allowance sum ?
With regard to Defined Contributions pensions:
- It relates to your contributions, plus any tax relief that is added to your pension.
- Any employer contributions paid by your employer,
- Or any contributions made an a person on your behalf.
With regard to Defined Benefits pensions:
- It related to how much your pension benefits have increased in value compared to the previous tax year.
So how much is the Annual Allowance ?
At present (as per tax year 2024/2025) the annual allowance is set at £ 60,000 per tax year. Or if you are earning a lower salary, it is set at that amount. So if you are earning £ 30,000 per annum you can make contributions up to that limit.
If you are lucky enough to have used their full allowance of £ 60K per annum. You have the option to use any unused allowance from the 3 previous years. This is known as “Carry Forward“.
You can still contribute to a pension even if you are not in employment or have no earnings. But this amount to limited to £ 2880 net per annum and HMRC will add tax-relief up to £ 3,660 per annum. This amount of tax-relief is normally claimed by your pension provider and will be paid into your pension plan within a few weeks after you make monthly or one-off payments.
Greater information can be found on the gov.uk website via: https://www.gov.uk/browse/tax/income-tax
What about high earners ?
If you are lucky enough to earn income over £ 200,000 per annum. Your annual allowance will be reduced gradually to £ 10,000 in the current tax year. This is known as “Tapered Allowance“
So what age can I make pension contributions into a pension scheme ?
At present you are able to make contributions into a pension scheme until age 75 and still receive tax-relief on the contributions you make.
This will normally relate to Defined contributions or private / personal pensions you may have. If you are contributing into a Defined Benefits pension, it is normally to the Normal Retirement Date (NRD) of the shame in question. Most DB pensions will be set up to age 60 or 65. With current scheme currently be linked to your current state, presently 66 or 68. So it may be worthwhile checking the exact rules with your DB or CARE pension.
Can my level of Annual Allowance be reduced ?
If you happen to access funds from a Defined Contribution pension on a flexible basis. So buying a fixed term of flexible annuity, accessing via FAD, or via UFPLS, or cashing in a pot completely which is over £ 10,000. You will trigger something called the MPAA (Money Purchase Annual Allowance), this means that you can make contributions in future but you are limited to £ 10,000 per annum for tax-relief.
See my blog post on further information of the MPAA: https://moneyminted.co.uk/what-is-the-money-purchase-annual-allowance
This will affect every tax year in future, moving forwards. For most people this isn’t a problem or consideration, as their level of contributions is below that limit as they are in a simple Auto-Enrolment scheme.
But it may become an issue if you are earning a high salary, and paying in a large % of your salary. Or you are paying in a high level of pension contributions via some kind of windfall. So give some consideration if you do decide to access a DC pot, as it may reduce future level of contributions you can make moving forwards.
Are there any implications if I go over the Annual Allowance ?
You are allowed to contribute more than you annual allowance. But you will be subject to tax charges. If you do go over the annual allowance, the sum will be added to your annual taxable income for the tax year. So you will be paying income tax at the respective rates in place. If could push someone into a higher tax bracket if they do go over certain thresholds.
It may be useful and worthwhile to check with your current pension scheme, the amount that you are able to pay in. Ahead of making any decisions to pay in sizeable amounts into your pension scheme.
If you pension scheme, pays the charge on your behalf. This is known as “Scheme pays method” and means that your pension scheme is the reduced.
Are there any organisations that can help me ?
If you are concerned about this, you may wish to consult a pensions or tax expert, to clarify certain points as part of your overall tax planning.
You could use a Financial adviser, who should provide specific details about the rules in greater detail.
- They should provide exact details about your own annual allowance,
- how to use carry forward rules,
- tax charges if you do go over the threshold.
- Your options to offset your pension contributions to lower your tax bills.
Or you may wish to speak to your pension provider directly or you could use a free and impartial website offered by Money & Pensions Service, via their website: http://www.moneyhelper.org.uk
they will also have links to find an financial adviser or you could use the link via the FCA Register being: https://register.fca.org.uk
Remember !
If you found this blog post useful and informative, please feel free to check out my other posts on https://moneyminted.co.uk. Which cover pensions, savings, investing and recommended investing books. So you can improve your financial and investing knowledge, to reach your financial goals and aims.
It’s not a get rich quick journey, but you will get there in the end if you create an action plan and think long term.
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