How do annual allowances affect how much I can pay into my pension?

Paying into a pension is a great way to invest in your future and help you achieve a comfortable retirement. Although there isn’t a limit on the total you can pay into your pension each year, there is a limit on the total contributions of which you can claim tax relief, which is set by your ‘annual allowance’.

Annual allowance 2021/22

In the current tax year (2021/22), the standard annual allowance is £40,000 per year (or 100% of your earnings, if this is lower). Within this allowance, tax relief on members’ gross contributions is restricted to the higher of £3,600, or 100%, of relevant UK earnings. It is the earnings that attract tax relief. Employer contributions are not restricted in this way, but they may not receive tax relief on the entire contribution.

Members can subject to a tax charge on the amount of any contribution paid (by the member, employer or third party), in excess of the annual allowance each year. The tax charge will be at the member’s marginal rate of income tax.

Tapered annual allowance

Since 6 April 2020, individuals with an adjusted income over £240,000 or a threshold income over £200,000 will have their annual allowance for that tax year restricted – for every £2 of income they earn over £240,000, their annual allowance is reduced by £1.

Threshold income refers to all of your earnings (not just your salary) and includes chargeable gains on investment bonds. Threshold income does not include pension contributions.

Adjusted income refers to all of your earnings which are subject to UK income tax, including all pension contributions paid by you, and your employer.

The maximum reduction which can be implemented is £36,000 – anyone with an income of £312,000 or more has an annual allowance of £4,000. Individuals who fall into this category may benefit from reducing the contributions they pay (and their employer), or an annual allowance charge will apply.

Can I ‘carry forward’ unused allowances?

If you wish to pay more in your pension than the annual allowance and still claim tax relief, you are able to ‘carry forward’ any unused allowances from the previous three years.  You would still need to utilise your current year’s allowance first, but this could be useful if your earnings vary from year to year, or if you are looking to extract cash from a company, in a tax efficient manner.

Including the current tax year allowance, ‘carry forward’ gives you the opportunity to pay up to £160,000 into your pension in one year (if you haven’t utilised your allowances in the previous three years).

‘Carry forward’ is a useful way to ‘catch up’ on your pension contributions, especially if you are self-employed or have received an inheritance in a particular year. However, net personal pension contributions only benefit from tax relief in respect of relevant earnings.

Be aware of exceeding your annual allowance – any excess contributions will not benefit from tax relief and you may receive an annual allowance charge. The annual allowance charge will be added to the rest of your taxable income for the tax year.

Get in touch

If you have concerns about your pension annual allowances or would like to speak to someone about your pensions or other investments, contact our wealth management team (01254 679131 / wealthmanagement@pmm.co.uk) who will happily arrange a meeting to help you achieve more from your pension and long term financial plans.

 

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