In this blog I will look to answer the question How much can I pay into a pension? Taking into account the annual allowance, carry forward, the impact on the annual allowance for higher earners and the money purchase annual allowance. I will also explain the implications of going over the amount you are allowed to pay in. If you do not know what a pension is, read my previous blog What is a Pension?
So, How much can I pay into a pension?
The Annual allowance
In simple terms, the amount you can pay into a pension and receive tax relief is the lower of 100% of your earnings or the annual allowance. The annual allowance is currently £40,000. Non tax payers can pay in £3,600.
An example of this is as follows:
- As a non tax payer, you could pay £2,880 into your pension. You would receive £720 tax relief and have £3,600 invested into your pension.
- If you were earning £30,000, you could pay £24,000 into you pension. You’d receive £6,000 tax relief to make up 100% of your earnings.
- If you earn £50,000 you could pay £32,000 into your pension. You would receive £8,000 tax relief* to make up the £40,000 annual allowance.
Simple right? Not really.
If you have unused annual allowance from the previous 3 years, you can carry this forward to use. You have to:
- Use this years annual allowance first and
- Have earnings in the current year equal or more than the amount you want to contribute.
- Have been a member of a UK registered pension scheme (this does not include the State Pension) in each of the years from which you are carrying forward, even if you haven’t contributed to it.
- If you have not used the annual allowance for this year and have only paid in £10,000 for each of the previous 3 years, your carry forward amount PLUS the annual allowance would be £130,000 this year.
- If you wanted to pay £180,000 into a pension and you had earnings of £60,000, the amount you could pay in is £130,000. However, this is limited to 100% of this years earnings so £60,000.
Simple? It gets more complicated.
Anyone earning more that £150,000 per annum will have their annual allowance reduced by £1 for every £2 they are in excess of £150,000. This means that anyone earning over £210,000 will have an annual allowance of £10,000.
The £150,000 includes ALL taxable income plus any employer pension contributions. If you earn over £110,000 you may also be impacted so need to be aware of this. If you are unsure if this impacts you, speak to your Independent Financial Adviser.
Money Purchase annual allowance
If you have started taking an income from your pensions either via Flexi-access drawdown or by uncrystallised pension lump sum (UFPLS), the amount you will be able to pay into a pension is restricted to £4,000. If you have triggered the MPAA, you will not be able to use carry forward. If you are unsure if this affects you, speak to your Independent Financial Adviser.
What happens if you go over the amount you’re allowed to pay in
If you go over the amount you are allowed to pay into pensions in any year, you will have to pay a tax charge. This charge will apply to the amount contributed by you, your employer or a 3rd party that is in excess of your annual allowance. The tax charge will be at the your marginal rate of income tax. This would usually be taken via your tax return.
This blog has answered the question How much can I pay into a pension? Although in simple terms, this is “simple” the issue can become more complex and muddied based upon various factors as outlined above. If you are in any doubt about the amount you can pay into a pension, you should speak to an Independent Financial Adviser.
If you would like a complimentary no obligation initial discussion, please contact me.
*Higher rate tax payers can reclaim their additional tax relief via their tax return.