Note: Before we start, you may want to read our guide on the different types of pensions in the UK.
Paying into your pension can be a great way to save for the future and help prepare for a time when you’re no longer working.
However, there are a few things that you need to know about your pension contributions and your annual allowance which we’ll cover in this article:
What’s my pension allowance?
Each year, you can put as much into your pension as you want, however, the amount you’ll receive tax relief on is limited. And this tax-efficient portion is referred to as your pension annual allowance or pension contribution limits, and there are a number of rules and conditions that surround it.
The annual allowance limit for the current tax year is £60,000, or up to 100% of your income (whichever is lower). This limit includes all your contributions, the tax relief on it, as well as any employer contributions across all of your pensions.
If you exceed this allowance, then you won’t receive tax relief on the contributions you made that went above it. Plus, you’ll also be faced with an annual allowance charge, which is added to your taxable income for the year.
It’s worth noting that if you have an income of over £260,000 (as of the 2023/24 tax year), then your annual allowance for that tax year will reduce. This reduction is called an ‘adjusted income limit’, and for every £2 you earn above £260,000, your annual allowance will reduce by £1.
This stops at £360,000, and you will retain an allowance of at least £10,000. This is called a ‘tapered annual allowance’ and you can find out more about how this works on the MoneyHelper website.
Does my pension allowance change?
Your pension allowance currently stands at £60,000, but it may be subject to change in future. In fact, until 6th April 2023, it was £40,000 and had been that amount since 6th April 2016.
Below details historic pension allowance changes:1
- 2016/17 to 2022/23: £40,000
- 2014/15: £80,000 (6th April 2015 to 9th July 2015) and £0 (9th July 2015 to 5th April 2016)
- 2021/13 to 2013/14: £50,000
You’ll notice that there were significant changes within the 2015/16 tax year, where the pension allowance doubled. There were also differences within the year, which is due to pre-alignment tax year where 2015/16 was split into two mini tax years. The annual allowance for the pre-alignment period – between 6th April and 8th July – was £80,000 and £0 for the post-alignment period from 9th July to the end of the tax year.
However, any unused annual allowance from the pre-alignment period could be carried over into the post-alignment period, but this was capped at a maximum of £40,000. This was a little bit confusing and only benefitted a very small number of savers, and therefore it was scrapped after a single year.
The pension allowance for adjusted income has also changed since it was introduced on 6th April 2016. In all subsequent years, the threshold income limit was £110,000 with an adjusted income limit of £150,000, however for the 2020/21 tax year these limits were increased to £200,000 and £240,000 respectively. Then for the 2023/24 tax year, the threshold income limit remained the same, but the adjusted income limit went up to 260,000.
What happens if you go over your pension contribution limit?
If your pension contributions exceed your annual allowance, then you may need to pay tax on any amount above the limit. You might be able to carry over any unused allowance from the previous three tax years – we’ll provide more details on this later.
In cases where you aren’t able to carry forward unused allowance, you’ll be subject to an annual allowance change. You can find out if you’ll have a charge on your pensions by using the HMRC annual allowance calculator: https://www.tax.service.gov.uk/pension-annual-allowance-calculator?
Depending on your pension scheme, and how much the tax charge is, either you or your pension provider will pay this charge. It’s worth noting that if your scheme provider does pay this charge, then they may also reduce the benefits you receive to correspond. You can find out more about paying annual allowance charges on the government website: https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge
What is the pension lifetime allowance?
In addition to having a yearly allowance, there’s also a limit on the amount you can withdraw from your pension without receiving an extra tax charge from HMRC. For the 2023/24 tax year, your lifetime pension allowance is £1,073,100.
This allowance will only impact those with significant pension pots, so it is worth understanding how to work out your allowance and what happens if this amount is exceeded. As we mentioned, the lifetime allowance is currently £1,073,100, but it hasn’t always been this limit. Here are the historical lifetime allowances:1
Does lifetime allowance apply to me?
The best way of understanding whether the lifetime allowance will apply to you is to add up the expected value of your pension payouts. How this is done will depend on the type of pension scheme that you’re in (Here's a quick explainer of the types of pension in the UK).
- With defined contribution pension schemes, including personal pensions*, this will be worked out by combining the value of all your pots and any benefits you’ll be using to pay for your retirement income or lump sum payment.
- For defined benefit pension schemes, you’ll need to multiply your expected annual pension by 20 and, if receiving one, add any tax-free cash lump sum that will be in addition to the pension. Please note that the amount paid will depend on your pension scheme’s rules, not on investments or much was paid in. If it’s a workplace pension, it could be based on your salary and how long you’ve worked for your employer.
- When you start taking money from your pension, you should receive a statement from your pension provider letting you know how much of your lifetime allowance you’re using up.
What happens if you exceed the lifetime allowance?
If the value of all of your pensions together exceeds the lifetime allowance, then you’ll be taxed on the excess. The way in which you’re taxed will depend on whether you’re receiving the pension in a lump sum or as a retirement income.
With lump sums, any amount of the sum that exceeds your lifetime allowance will be taxed at 55%. This should be deducted by your pension provider and paid to HMRC before the balance is given to you.
When taking an income, any portion that exceeds your lifetime allowance will be taxed with a lifetime allowance charge of 25% which is on top of any taxable income. The first 25% of your pension pot is taken tax free, but the remaining 75% is subject to income tax – but please note that the tax relief is not always applicable to defined benefit.
So, for example, if you pay tax at the higher rate, each £1,000 over the lifetime allowance would be reduced by 25% due to the extra charge, reducing that amount to £750. Once income tax is added at 40%, there would be £450 left of the original £1,000 which exceeded the lifetime allowance – effectively reducing this income by 55%, which works out the same as if you had chosen to take a lump sum.
Does my pension allowance change if I’m accessing it?
Yes. If you’re already accessing the money in your pension – often referred to as drawdown – then you’ll have a lower pension allowance. In this situation, your allowance may drop to £10,000 a year. It’s worth noting that this still applies across all your pension schemes, and not just the one that you’ve accessed. It will also include your pension contributions, tax relief, and any employer contributions during that tax year.
Can I carry forward my pension allowance?
With your annual pension allowance, some providers support carry forward, which allows you to utilise any unused allowance from the previous three tax years. For example, if you were eligible for the full allowance but only saved £20,000 for the 2021/22 and 2022/23 tax years, then you could be able to carry forward the £40,000 of unused allowance in addition to the £60,000 allowance for the 2023/24 tax year.
You may have noticed that during the 2015/16 tax year, the pension allowance doubled – this amount could have been carried forward up until 6th April 2019, which means that period is now finished.
How to stick to my pension annual allowance?
As your annual allowance applies to all of your pensions, and includes contributions made from you, tax relief, and employers, keeping track can become tricky. This can be made even more difficult if you have multiple pensions to keep track of.
There are a couple of potential solutions here, firstly, you could reverse engineer how much you’re able to put away each month and stay within the allowance. This would mean ensuring that the most that’s being contributed to your pension each month is £5,000 – obviously, if you go under one month, you could go the same amount over the next.
Another option could be to simply consolidate your pensions into one place. You can easily transfer a pension to your chosen provider, putting all your future funds in one location. If you’re using an online pension provider, like Wealthify, you’ll have access to an interactive dashboard that gives you a complete oversight of your investments, so you’ll know exactly how much they’re worth, what you’re invested in, and how close you are to going over your annual allowance.
Want to know how much money you could have when you retire? Our pension calculator can help give you a good idea of what your yearly or monthly income could be. Why not have a play with the figures to see how much of an impact little changes can make? Try it here: wealthify.com/pension-calculator
*A personal pension (also known as a 'Self-Invested Personal Pension' or 'SIPP') is a type of pension that you personally set up and contribute to. This is separate from a workplace pension or the state government-funded pension and can give you greater flexibility over how you contribute and invest for your future.
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The tax treatment depends on your individual circumstances and may be subject to change in the future.
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