It is safe to say that we all want to build the biggest pension pot we can, to provide for our retirement.
One way to do this is to make sure that you are not paying more tax than you need to, by saving as much as you can tax-efficiently and benefiting from the tax relief that is available to you.
In this article, our expert team of independent pension advisers at PIL Southampton covers all the key information you need to know.
The annual allowance is the term used to describe the maximum amount you can save into your pensions each tax year and still receive tax relief on your and your employer’s contributions.
The annual allowance applies to personal, or ‘private’, pensions and work-based pensions. Your state pension is NOT included in the annual allowance and any investment returns you receive from a pension scheme are not counted in your annual allowance either.
You have one annual allowance that covers all your pensions combined. There isn’t a different allowance for each of your pension schemes.
Currently, the annual allowance is £60,000 but you only get to claim tax relief on this amount if your annual salary is at least £60,000 as you can’t pay more than 100% of your earnings into a pension.
If you earn between zero and £3,600, you can contribute up to £3,600 to a pension and benefit from tax relief up to that full amount.
All payments into your defined contribution pension, whether paid by you or your employer, must be less than your annual allowance, and your total contributions have to be less than your annual earnings.
As there is only one allowance, if you have ever belonged – past or present – to a final salary scheme (also referred to as a salary-related or defined benefit scheme) you need to contact that scheme’s pension provider to make sure you have an accurate record of any amounts, known as pension input amounts, that would count as contributions calculated in your annual allowance.
This affects high earners. Anyone earning over £200,000 and having an ‘adjusted income’ of over £260,000 including pension contributions will see their annual allowance fall.
Known as the ‘tapered annual allowance, it reduces every £2 of adjusted income above £260,000 by £1. The tapering stops when the annual allowance falls to £10,000.
So, for an adjusted income up to £260,000 the annual allowance is £60,000. For a £280,000 adjusted income the allowance is £50,000 and, by the time you get to a £360,000 adjusted income level, the annual allowance is £10,000. However much you earn above £360,000, the annual allowance stays at £10,000.
If you go over your annual allowance, you will not receive tax relief on any amount above the annual allowance.
Any pension contributions you make that take you above the annual allowance will be added to your gross income for that tax year and you will be charged the appropriate income tax accordingly.
It is your responsibility to check whether you have gone over the annual allowance, and to calculate and pay the tax charge if and when you do go over the annual allowance.
The amount of the tax charge will be defined by how much you have gone over the annual allowance for the current tax year and for any previous tax years that you carried your annual tax allowance forward from. The highest rate of income tax you are paying in the current tax year will also form part of the tax charge calculation.
If the income tax you owe on any pension contributions above the annual allowance is above £2,000, you will have the option to have the amount deducted from your pension instead of paying it directly. This will not happen automatically – you will have to ask your pension provider to pay the annual allowance tax charge on your behalf. It is known as ‘scheme pays’ and it will reduce your pension benefits.
Your other option is to pay the charge yourself. Whichever option you choose, you will need to complete a Self-Assessment tax return as this process will calculate how much you need to pay or inform HMRC that your provider has already paid the charge on your behalf.
Yes, you can carry forward any unused annual allowance from the previous three tax years.
It’s worth noting, however, that although the allowance is currently £60,000, it was £40,000 in the 2022/23 tax year, so that is the figure you would calculate any unused allowance for that year.
Our friendly and experienced team of independent financial advisers at PIL Southampton is here to help you to navigate the world of pension contributions and the relevant tax implications. It is our priority to provide the most appropriate and beneficial financial advice to best suit your individual circumstances.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.