Annual allowance, explained

We often get asked “What’s the maximum pension contribution that can be made?”. The answer depends on a few factors. As part of our Bitesize Technical series, Senior Technical Consultant, Lisa Webster, explains the rules around the annual allowance, and how it impacts tax relief:

• What is the annual allowance?
• What counts towards the annual allowance?
• What happens when the annual allowance is exceeded?

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on the annual allowance

What is the maximum pension contribution that can be made?

Theoretically, pension contributions are unlimited, but what most people really want to know is the maximum they can put in and benefit from tax relief, without incurring additional tax charges.

So, what is the annual allowance?

The annual allowance is a cap on the total amount paid into pensions for an individual’s benefit in a single tax year.

What’s included in the annual allowance?

Any money paid into pensions personally, the associated tax relief, employer contributions, and contributions from anyone else, all count towards the annual allowance.

Does the annual allowance apply to everyone?

Most people are subject to the standard annual allowance of £60,000. However, anyone with high income – over £200,000 a year from investments as well as earnings – may have their annual allowance tapered to a lower amount.

If pensions have been accessed, then a lower annual allowance may apply. This is known as the money purchase annual allowance, or MPAA, and is £10,000.

What happens when the annual allowance is exceeded?

If pension savings of more than the annual allowance are made in one tax year, then an annual allowance charge may apply. This isn’t always the case though, as it may be possible to carry forward unused allowances from up to three previous tax years.

Does the annual allowance restrict tax relief?

The annual allowance does not restrict tax relief. That might sound a bit odd, but tax relief on pension contributions and the annual allowance are two separate things to consider when deciding how much can be paid into a pension in a tax-efficient manner.

Should tax relief be claimed if the annual allowance has been exceeded?

If the available annual allowance is exceeded, then tax relief should still be claimed in the usual way – so for personal contributions under relief at source, this would usually be by completing a self-assessment. However, there will also be an annual allowance charge to pay.

More Bitesize Technical

Employer contributions explained

Learn more about employer contributions. Watch the video here.