How much can I pay into my pension from 6 April?
Provided you’re a UK tax payer, you will receive tax relief on anything you pay into your pension up to the amount you earn or your annual allowance (currently £40,000 per year), depending on which is lower. If you pay more into your pension than you are allowed, you may incur a tax charge to recover tax relief over and above what you’re entitled.
Pensions and tax relief
For, the amount of annual allowance you have used is found by adding together the total contributions paid by you or on your behalf over the tax year. For , the amount of annual allowance used will be based on the increase in your entitlement to pension benefits over the tax year.
You may be able to carry forward unused allowance from the three previous years to increase the amount of tax-relieved saving you can make in the current year.
If your total income exceeds £110,000
From the 2016/17 tax year, if your income exceeds certain thresholds in any tax year your annual allowance for pension savings in that tax year will be reduced (or ‘tapered’).
You may be subject to a gradual tapering of your annual allowance if your total income (including savings and investment income) subject to tax is more than £110,000 in any tax year. The maximum reduction for those with the highest incomes will be £30,000, leaving a minimum annual allowance of £10,000 in a tax year.
Regardless of whether you are subject to the tapered annual allowance or not, you may still be able to carry forward unused allowance from the last three years to increase your allowance in any tax year.
If you have drawn pension benefits flexibly
The Money Purchase Annual Allowance (MPAA) will apply to you if you have flexibly accessed pension benefits on, or after 6 April 2015. Your pension scheme or provider paying these benefits will have informed you if you are subject to the MPAA at the time they paid the flexible benefits. Examples of drawing benefits flexibly include taking income from Flexi-Access Drawdown or taking a cash lump sum direct from your pension plan (excluding a ‘small pot’ or ‘tax-free cash’).
The MPAA for the 2016/17 tax year is £10,000, and would apply to money purchase savings made from when you first flexibly accessed benefits.
In any year when you exceed the MPAA, your annual allowance for other types of tax-relieved pension savings, such as defined benefit pension schemes or, is reduced by £10,000.
Impact of Money Purchase Annual Allowance on your Tapered Annual Allowance
If you are subject to both the MPAA and the tapered annual allowance, your MPAA will remain at £10,000. However, in any year when you exceed the MPAA, your annual allowance for other types of tax-relieved pension savings, such as defined benefits (currently £30,000) will be subject to a gradual tapering.
The amount of the tapered reduction will depend on the amount of your total income and potentially, could reduce your allowance for other types of pension savings to nil in the tax year where the MPAA is exceeded.
The Lifetime Allowance
There is a limit to the amount of benefits you can take from your pension savings before you incur a tax charge. This limit is known as the standard lifetime allowance and from 6 April 2016, the standard lifetime allowance reduced from £1.25m to £1m. Your benefits will be subject to a tax charge if they exceed the Lifetime Allowance at the time you take them.
What if you exceed any of these allowances?
If you exceed any of the allowances mentioned above, you may incur a tax charge on any future pensions contributions which exceed this limit in a tax year, whether paid by you and on your behalf.
Further information on pension allowances can be read in this flyer. Additional information can also be found on our Tax and allowances webpage or on the Pension Advisory Service website. This is a complicated subject and, if you feel that these changes affect you, speak to a financial adviser or contact HMRC.
Tax rules require careful consideration and may not reflect your individual circumstances. The above is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice.
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Tax information and allowances
Government tax rules and regulations that may affect you if you are saving, investing or have a pension plan.
Tax benefits of saving in a pension
Saving in a pension is a tax-efficient way of building up an income for retirement.