Pensions Annual Allowance

Pensions Annual Allowance

The annual allowance is the maximum amount of ‘benefit’ or ‘total pension input’ that can build up from contributions during each ‘pension input period’ without incurring a tax charge. If the annual allowance is exceeded, an annual allowance charge is payable at your marginal rate/s of income tax i.e. 20%, 40% or 45%.

In 2010/11 the annual allowance was £255,000. However, it was reduced to £50,000 in 2011/12 and, on 6 April 2014, it was reduced to £40,000.

Tax yearAnnual allowance
2016/17£40,000
2015/16£40,000
2014/15£40,000
2013/14£50,000
2012/13£50,000

Carry forward rules

Even though the annual allowance for the current tax year is £40,000, you may be able to make additional contributions of up to £140,000 into your other pension under HMRC’s ‘carry forward’ rules.

These rules allow you to carry forward any unused annual allowance for the past three tax years – as long as you had a pension in place for each of the three years and your total contributions don’t exceed your current earnings.

Pension Input Periods

With effect from 6 April 2016, all pension input periods will be the same period as the tax year. Because this is not currently the case for some pension schemes, the tax year 2015/16 will act as a transition from each scheme’s current pension input period to the tax year. This transition will apply regardless of whether or not a pension scheme already uses tax years for its input period.

Total Pension Input

The total pension input is the amount of contribution that will be tested against the annual allowance. The total pension input is calculated according to the type of scheme to which your and/or your employer contributes.

Defined Contribution Schemes

The following elements are included in the total pension input:

  1. Any relievable pension contribution paid by you or someone else on your behalf.
  2. Any contribution paid on your behalf by your employer.

The tax relief is awarded at the time the contribution is made. The total pension input calculation will take place at the end of the pension input period, once all contributions have been made so that the total pension input can be entered onto your self-assessment tax return.

As a result of this, a calculation will be done to see whether an annual allowance tax charge is due.

Because the tax relief is awarded at the time the contribution is made, the ‘relievable pension contribution’ is taken into account when calculating the total pension input.