Pension Annual Allowance

What counts towards the annual allowance?

What happens if I exceed the annual allowance?

What if I haven’t used all my allowance?

Tapered annual allowance for income over £260,600 from April 2023.

Money Purchase annual allowance

How can Howard Wright help me?

Pensions are a great way of saving for your financial future in a tax-efficient manner. We have discussed in previous articles some of the benefits of investing in pensions, especially from a tax point of view.

Due to the generous tax advantages available when investing in pensions, there are limits on the amount you can invest each year and receive tax relief. As such, when making pension contributions is important to ensure you don’t exceed the annual allowance.

The annual allowance is the limit on the amount an individual can pay into a pension each year and still benefit from tax relief. Whilst you can still pay in more than this, you would not receive tax relief on contributions over this amount.

What counts towards the annual allowance?

The annual allowance is the total of your contributions, your employer contributions and any other third party contributions. The annual allowance for the 2023/24 tax year is £60,000 or 100% of earnings if lower. If you earn less than £3,600, you can pay up to £2,880 and still get tax relief.

The annual allowance is per person not per pension. As such if you have more than one pension, you will not have more than one annual allowance. 

If making a pension contribution from your company or receiving a contribution from your employer, it must be wholly and exclusively for the purpose of the business but can exceed your income. It does however still count towards your annual allowance.

What happens if I exceed the annual allowance?

If you exceed your annual allowance the first thing to note is that the money won’t be rejected by the pension provider however, you will not receive tax relief on any amount in excess of the annual allowance excess amount. The excess contributions will be added to your gross income for that year, and your income tax bill is recalculated based on this higher figure.

If the charge is over £2,000 then you may be able to for it to be deducted from your pension instead. Unfortunately, not all pension providers will allow this which means that you may need to fund capital to pay your higher tax bill. 

What if I haven’t used all my allowance?

If you have not used all of your annual allowance in the previous 3 years you may be able to carry this forward, as long as during those years you were a member of a pension scheme. Similar to the annual allowance in any individual year, you would need the income to support the carried forward allowance in the tax year you make the contribution (or could receive an employer contribution in excess of salary if an option for you)

There are also some conditions that need to be met to use your carry forward allowance.

• When making a contribution you need to use all of your current tax year annual allowance first only then can you use carry forward allowance
• After the current tax year has been exhausted you must use the carry forward allowance from the earliest year first
• You must have been a member of a UK registered pension scheme in each of the tax years that you wish to carry forward from. This does not mean that you needed to have contributed in those years just that you had an active pension
• If you are subject to the tapered annual allowance as detailed below, you will need to assess the unused annual allowance against the tapered annual allowance for each year

Tapered annual allowance for income over £260,600 from April 2023

For individuals with an “adjusted income” over £260,000 from 6 April 2023, the annual allowance is reduced by £1 for every £2 you are over the limit. This continues until you reach the minimum annual allowance of £10,000 which you would do once your income reaches £360,000.

Adjusted income is simply your total income plus any pension contributions you make in that year that aren’t from your taxed income such as salary exchange. 

Money Purchase annual allowance

For those who have previously accessed income (not tax free cash) in the form of drawdown (not annuity), you will also see your annual allowance reduced. This reduces your annual allowance to the Money Purchase Annual Allowance (MPAA) which is currently £10,000 from April. Once you have accessed income from a drawdown and become subject to the money purchase annual allowance there is no way to go back to having the full annual allowance. 

How can Howard Wright help me?

If you think you might be getting close to your annual allowance, that it could be reduced or you might have exceeded it, consider getting advice from a regulated financial adviser like ourselves at Howard Wright.

We can help you understand how much your annual allowance is including any unused amounts, whether you’ve exceeded your annual allowance, if there may be options to reduce any potential charge and look at your options for paying any tax charges that may be due.

Disclaimer

This article contains information from sources believed to be reliable but no guarantee, warranty, or representation, express or implied, is given as to its accuracy or completeness.  Howard Wright Ltd does not undertake any obligation to update or revise any future statements.  Past performance is not a reliable indicator of future results. Investments can go down as well as up and actual results could differ materially from those anticipated. This article is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any person as such, the information contained in this article is not intended to constitute, and should not be construed as, investment or financial advice.  Appropriate personalised advice should be taken before entering into any transactions.  No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication.  Howard Wright Ltd is Authorised and regulated by the Financial Conduct Authority.