One way to invest in your future and help build towards a comfortable retirement, is by paying into a pension. Pensions can’t be accessed until you reach the minimum pension age (currently 55), but there are important considerations to ensure you are making the most out of your available allowances right now.
There is no limit on the total amount you can pay into your pension each year, however, there is a limit on the total contributions on which you can claim tax relief, this is your ‘annual allowance’.
How does an annual allowance work?
Your annual allowance is the most that you are able to save in your pension pots in a year (6 April to 5 April).
You will be required to pay a tax charge, equivalent to the amount of tax relief that you benefitted from, if you go above the annual allowance, which is currently £40,000 per year. Your annual allowance applies to all your private pensions, if you have more than one.
Tapered Annual Allowance
The taper of the allowance will kick in when you reach a certain level of income. Anyone with an adjusted income over £240,000 or a threshold income of over £200,000 will have the annual allowance for that tax year restricted. If this is the case, your annual allowance would be reduced by £1 for every £2 of income you earn over £240,000. If you have adjusted income of £312,000 or over, you will be limited to a £4,000 pension contribution.
Threshold income includes all your savings (not just your salary) and includes chargeable gains on investment bonds. It does not include pension contributions.
Adjusted income is all of your earnings which are subject to UK income tax, including all pension contributions paid by you and your employer.
So, be aware, as a contribution in itself can reduce the annual allowance that is available to you.
What if I don’t use all my allowance?
You are able to ‘carry forward’ any unused allowances from the previous three years, meaning you could be allowed to pay more into your pension than the annual allowance whilst still claiming tax relief. You would need to use your current year’s allowance first but this could be of benefit if your earnings differ from year to year, or perhaps you’re looking to extract cash from a company in a tax efficient manner. You would then use the furthest year’s unused allowance and work yourself forward to latest allowances.
As you can see, the rules are complex and each person’s circumstances will be different. It is important to get tailored advice to ensure you are making the most tax efficient choices for you.
Get in touch
If you have concerns about your pension annual allowance or would like to discuss your pensions or other investments, our financial planning team are here to help. Get in touch by emailing enquiries@pmm.co.uk or calling 01254 679131.
A comment to note that the article does not constitute personalised advice and that advice should be sought before taking any action.
