Your guide to a tax-efficient Pension.

What is the Pension annual allowance?

The Pension annual allowance is the most you can pay into your Pension pots in a single tax year, and still benefit from tax relief.

The allowance applies to the gross amount all personal, self-employed, company/employer and third-party contributions.

Your private Pension and auto enrolment contributions are tax-free up to certain limits – you’ll only pay tax if you go above the annual allowance.

You can usually get tax relief on contributions up to the higher of your UK relevant earnings or £3,600 gross per year. The annual allowance is £60,000 for the 2023/24 tax year, unless the money purchase annual allowance or tapered annual allowance apply. For tax years 2016/17 to 2022/23 it was £40,000.

Contributions larger than the annual allowance can be permitted by using carry forward – bringing unused allowances from the three previous tax years into the current year.

It’s very important to check that you have worked out the correct annual allowance amounts available for carry forward. When you’re using carry forward, you’re working out the unused annual allowance not unused tax relief.

Pension eligibility and tax rules apply. 

History of the annual allowance.

Since April 2016, the allowance has been tapered for individuals with adjusted income of more than a certain level.

This only affects you if your ‘threshold income’ is above £200,000, and your ‘adjusted income’ is above £260,000 (this threshold increased to £260,000 from April 6th 2023).

In previous tax years (2020/21 – 2022/23) the amount was £240,000 and before that it was £150,000.

The rates of adjusted income and annual allowance were updated on this page were updated on 6/4/23 for the 23/24 tax year.

If you start to take more than your tax-free cash from your Pension pot, this can trigger a lower annual allowance of £10,000 (current as of 2023/24 tax year). This is known as the Money Purchase Annual Allowance (MPAA). The MPAA increased from £4,000 to £10,000 in April 2023 and the rise means you can pay in more than you previously could without facing a tax charge.

It impacts people who have started taking their Pension savings but want to keep paying into their plan.

You’ll no longer be able to use the carry forward option to make contributions of more than your annual allowance if you trigger the MPAA.

If you have any questions, please speak to one of our advisers. Professional expertise will help you to decide upon a course of action that is best suited to your unique circumstances. 

The allowances on this page were updated on 6/4/23 for the 23/24 tax year.

Pensions tax relief conditions and limitations.

You can get tax relief on your gross private Pension contributions worth up to 100% of your annual earnings. Tax relief is only given on pension contributions if you are under age 75 and are a relevant UK individual.

The gross amount of any contributions made by you – or someone else on your behalf – must be equal to or less than your UK earnings for the tax year in which they are made.

If you earned £30,000 for example but put £35,000 gross into your Pension pot by topping up earnings with some savings, you’ll only be entitled to tax relief on £30,000 gross.

If you earn above the annual allowance and have sufficient carry forward available, you can get tax relief above £60,000.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest.

Amount of relief available.

Tax relief is available on your pension contributions at the highest rate of income tax that you pay.

As a basic-rate taxpayer you can qualify for 20% in basic-rate tax relief when you add money to your pension, even if you don’t pay tax or are a non-earner.

If you’re a higher-rate taxpayer, you can get up to 40% tax relief. If you’re an additional-rate taxpayer, you can get up to 45%.

It’s important to be aware that you must pay sufficient tax at the higher or additional rate to claim the full 40% or 45% tax relief.

What is the Pension Lifetime Allowance?

The lifetime allowance is the total amount you can build up in all your Pension savings without incurring a tax charge. It applies to all your personal and Workplace Pensions but not your State Pension or any overseas pensions.

The lifetime allowance was set at £1,073,100 for the 2023/24 tax year and the rate of tax you pay on Pension savings above this depends on how the money is paid to you and when you took your Pension savings.

If you took your Pension before April 6th 2023, the rate is:

• 55% if you get it as a lump sum
• 25% if you get it any other way, for example Pension payments or cash withdrawals

If you took your Pension on or after April 6th 2023, there is no lifetime allowance charge.

The lifetime allowance is being abolished from April 6th 2024.

What happens if I exceed my annual allowance?

If you go over your annual allowance, you won’t receive tax relief on the excess amount.

You will also 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, while the rate of the charge will depend on the tax band(s) that your income plus the excess contribution fall into.

Using your annual allowance to reach your goals.

By contributing to your Pension pot, you can not only protect your money from Income and Capital Gains Tax, but your contribution may also be eligible for tax-relief of 20% (or more if you’re a higher or additional rate taxpayer). This means if you add £800 net to your Pension this tax year, Government tax relief could take your total contribution to £1,000 gross.

It’s important to ensure your gross contribution does not result in your total gross personal contributions exceeding your relevant earnings in this tax year, nor does it result in your total gross contributions from all sources exceeding the Annual Allowance.

If you want to access your Pension savings but also want to continue to contribute to a Pension, you should take care and it is worth seeking guidance and/or financial advice first. For example, depending on how you access your Pension, this could reduce the maximum you are allowed to continue to save into it.

While Pensions have generous tax benefits, they also have restrictions on how you can access your money. You must remember that you can’t access your Pension until you’re at least 55 (this is set to rise to 57 in April 2028).

You can also hold as many Pension pots as you want, but there’s a limit to how much you can contribute to them in each tax year. You must be aware of your Pension annual allowance as discussed in this blog as this applies to the amount that can be paid in across all of your private Pensions combined in a tax year – not just a single Pension – before you face a tax charge. So if you have a personal pension and a workplace pension, you will have to split the allowance between them.

How to take advantage of your annual allowance today.

If you are a client with True Potential, you can login to your True Potential app or online account to take advantage of any remaining Pension annual allowance and potentially reach your retirement goals sooner.

Once you have accessed your Pension, tap impulseSave® and input the amount you wish to invest from £1 upwards. Confirm your details and we’ll process the contribution – it’s that simple.

For further support with your annual allowance, you can call our Relationship Management team on 0191 500 9164.

They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays.

If you’re not a client but want more information about how you can invest into a Pension with True Potential, you can call one of our experts on 0191 625 0350 to learn more.