The annual allowance is the limit on how much money you can build up tax-free in your pension in any one tax year.
The annual allowance has increased to £60,000 per year in 2023/24 tax year (previously £40,000).
Included in the allowance amount are the following –
- your own contributions (plus any tax relief you receive)
- any employer contributions, and
- any contributions made on your behalf by someone else.
The annual allowance applies across all your pension savings, not per pension scheme.
If you exceed the annual allowance in a particular tax year, you will not receive tax relief on any contributions you paid that exceed the limit in that tax year, and you will be faced with an annual allowance charge.
The amount you’ve exceeded the annual allowance by will be added to the rest of your taxable income for the tax year and be subject to Income Tax at the rate(s) that apply to you. You might be able to ask your pension scheme to pay the charge from your pension. This is known as Scheme Pays and means your pension would be reduced.
Tapered Annual Allowance
If an individual’s income is above £260,000 (‘threshold income’) in a tax year, their annual allowance for pension contribution gradually reduces by £1 for every £2 above £260,000 (‘adjusted income’). For example, if your adjusted income was £300,000 your annual allowance would be reduced to £40,000.
The maximum possible reduction for the AA is £50,000, i.e., anyone with adjusted income of £360,000 or more will have their AA tapered to the £10,000 minimum.
Making use of unused annual allowances
Carry forward allowances allows you to make use of any annual allowances that you might not have used during the three previous tax years if you were a member of a registered pension scheme during the relevant time. You do not need to report this to HMRC.
To use carry forward, there are certain conditions that need to be met. These include:
- Contributions to your pensions must have used all your annual allowance in the tax year you wish to use the carry forward rules.
- You must have been a member of a UK-registered pension scheme (this does not include the State Pension) in each of the tax years from which you wish to carry forward from (you do not need to have paid any money into these schemes).
- You must use any unused annual allowance from the earliest year first (you can only go back three years) and can only use it once. This means it can only be used once and if fully used for a previous tax year, cannot be used a second time.
- If you are subject to a tapered annual allowance, you need to measure any unused annual allowance against the tapered allowance for each given year (which may change depending on your adjusted income).
Here is a link to HMRC website, showing the previous annual allowances.
