Pension Annual Allowance

The Pension Annual Allowance is how much you can contribute to your pension pot each year before you have to pay tax on it.

How much is the annual allowance?

The maximum you can contribute to your pension without being taxed is £60,000 a year. There are two circumstances that can reduce this figure:

1. You have a high income

You’ll have what is known as a ‘tapered allowance’ if your income before tax and pension contributions is over £200,000, and all of your taxable income is over £240,000.

In this case, your allowance will be reduced by £1 for every £2 that your adjusted income exceeds £240,000.

2. You’ve flexibly accessed your pension

Once you reach the age of 55, you’ll finally be able to access the pension you’ve worked so hard for. But what are the tax implications of doing this, you say? 😅

Well, the general rule is you can take up to 25% of your pension pot without paying tax. Anything over 25% will be taxed as earnings along with any other taxable income you have (i.e your wages). 

And, you know the deal, more earnings = more tax. So this move could tip you into a higher tax bracket. 🫣

Can you carry over your pension annual allowance?

Good news! If you haven’t used your allowance, you can carry it forward from the past three years. 

So, if you’ve paid £30,000 into your pension for the past three tax years, then you’ve got £30,000 worth of allowance to play with in the next tax year (£10,000 for each year). 

You’re then able to contribute a whopping £70,000 to your pension in one tax year and get full tax relief on it. Not a terrible strategy eh? 😅

What happens if you go over your annual allowance?

If you pay in more to your pension than you’re allowed to in a tax year, there are two consequences you’ll face:

☝️ You won’t receive any tax relief  

✌️ HMRC will add an addition to your tax bill for that year – this is known as the annual allowance charge

So you can see why keeping an eye on how much you’re putting into your pension each year is a good idea…