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Pension allowances are limits on the amount you can invest in pension plans without being subject to a tax charge.
These limits include:
- Annual allowance
- Tapered annual allowance
- Money purchase annual allowance
- Pension lifetime allowance
Contributions
What is the limit on tax relief for personal contributions?
Tax relief on your personal contributions are limited to the higher of 100% of relevant UK earnings and £3,600, gross. This limit applies to all the contributions made by yourself (or by someone who is not your employer) to a pension in a tax year.
Annual allowance
What is the annual allowance for pensions?
There is a limit to how much you, your employer or any third party can pay into your pension each year without a tax charge applying. This limit is called the annual allowance.
How much is the annual allowance?
The annual allowance for this tax year is £60,000.
Carry forward of unused annual allowances
If you have any unused annual allowance from the previous three tax years, you may be able to use this in the current tax year. Remember, if making a large personal contribution, you would need to still have enough relevant UK earnings. For example, to pay in a personal contribution of £80,000, you would need to be earning £80,000.
What happens if you contribute more than the annual allowance?
If total contributions in a tax year are more than your annual allowance (including any unused annual allowance carried forward), a tax charge will apply. As mentioned above, tax relief on personal contributions are limited to 100% of relevant UK earnings and £3,600, gross. So, if you earn £70,000 in a tax year, you can get tax relief on personal contributions up to £70,000. But as this is over the annual allowance and assuming there is no unused annual allowance to carry forward, there will be a tax charge on £10,000 which effectively removes the tax relief on this part of the contribution.
Tapered annual allowance
If you have adjusted income for a tax year greater than £260,000, you'll have your annual allowance for that tax year restricted. This means that for every £2 of income you have over £260,000, your annual allowance is reduced by £1. Your reduced annual allowance is rounded down to the nearest whole pound. The reduction in annual allowance does not apply to individuals who have ‘threshold income’ of no more than £200,000.
Put simply, adjusted income is your taxable income plus any contributions made by your employer, while threshold income is your taxable income minus your gross personal contributions.
Your annual allowance can't be reduced to less than £10,000. So if you have an adjusted income of £360,000 or more you’ll have an annual allowance of £10,000. If you're caught by the restriction, you may have to reduce the contributions paid by both you and/or your employer or an annual allowance charge will apply.
We recommend you speak to a financial adviser for more information on the annual allowance or the tapered annual allowance.
Money purchase annual allowance
What is the money purchase annual allowance?
If you've already taken some of your pension savings, your future pension contribution limit may be restricted to the money purchase annual allowance (MPAA).
The MPAA is lower than the annual allowance and it may apply if you chose to flexibly access your pension savings on or after 6 April 2015.
The government introduced the MPAA to make sure there's no room to abuse the tax relief that can be claimed on any new pension contributions by those who have taken some or all of their pension savings.
How does the MPAA work?
If you choose to access your pension savings flexibly, you will trigger the MPAA. This means your annual allowance for contributions into defined contribution pensions would be reduced from £60,000 to £10,000 a year.
What triggers the MPAA?
- If you choose to take an income from a flexi-access drawdown plan set up from 6 April 2015.
- Taking a full or partial cash lump sum withdrawal from your plan.
- Taking an income above the maximum limit from an existing capped drawdown plan.
See our 'pension jargon and terms explained' at the bottom of this page for more information on capped drawdown.
What won't trigger the MPAA?
- Taking your 25% tax-free cash sum.
- Cashing in small pots.
- Taking an income from a capped income drawdown plan that's within the maximum limits.
- Additional designation from an existing capped income drawdown plan.
- Buying a lifetime annuity.
See our 'pension jargon and terms explained' at the bottom of this page for more information on cashing in small pots and capped income drawdown plans.
What do I need to do if the MPAA is triggered?
We'll let you know within 31 days of the MPAA being triggered.
You'll have 91 days to inform all pension plans you're contributing to that the MPAA has been triggered. If you join any new pension plans, you'll have a responsibility to let them know.
What about defined benefit pension plans?
If you're a member of a defined benefits pension plan and you've triggered the MPAA, the £60,000 annual allowance still applies to your total contributions/accrual. However, within your total £60,000 annual allowance, the maximum you can contribute to any defined contribution plans will be £10,000 before a tax charge applies. See our 'pension jargon and terms explained' at the bottom of this page for more information on defined benefit pension plans.
We recommend you speak to a financial adviser for more information or if you think this applies to you.
Pension lifetime allowance (LTA)
Before 6 April 2024, the lifetime allowance limited the amount of pension savings that could be built up without paying additional tax. This allowance was abolished from 6 April 2024.
What has replaced the LTA?
The LTA has been replaced by two allowances:
- The lump sum allowance (LSA) - £268,275
- The lump sum and death benefit allowance (LSDBA) - £1,073,100
Lump Sum Allowance (LSA)
The lump sum allowance (LSA) was introduced from 6 April 2024 and is the maximum amount of pension savings that you can receive tax-free across your pensions. Normally 25% of the pension savings you take can be paid tax-free, with an overall maximum limit of £268,275. The other 75% of your pension savings is taxed at your marginal rate of income tax.
Lump Sum and Death Benefit Allowance (LSDBA)
The total of all tax-free lump sums, including tax-free lump sum death benefits and serious ill-health benefits, will be tested against a lifetime limit, set at £1,073,100. Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax.
If you took pension benefits before 6 April 2024 and you’re over age 75
If you took any pension benefits before 6 April 2024, the value of these benefits were used to reduce the amount of lifetime allowance you had left. From 6 April 2024 this reduces the amount of LSA and LSDBA you have left.
Before 6 April 2024 when you reached your 75th birthday a calculation was done and the value of some of your pension benefits reduced the amount of lifetime allowance you had left. The value used to reduce your lifetime allowance was the value of any benefits you had not yet taken and the investment growth on any income drawdown benefits.
From 6 April 2024, if you are age 75 or over and have not taken any more pension benefits, the checks made on your 75th birthday are ignored when we calculate how much LSA and LSDBA you have left.
However, if you have taken more of your pension benefits between your 75th birthday and 6 April 2024, those benefits are included when calculating how much LSA and LSDBA you have left.