Pensions and tax
The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It’s based on your earnings for the year and is capped at £40,000.
What is the annual allowance?
The annual allowance is a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year. The annual allowance applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all of the contributions that you pay or your employer or anyone else pays on your behalf.
If you exceed the allowance
If you exceed the annual allowance in a year, you won’t receive tax relief on the contributions that exceed the limit. You may have to repay the tax relief, or pay income tax on benefits in a defined benefits scheme that exceed the limit, unless you’re using ‘carry forward’ to make use of unused annual allowances from the three previous years. The annual allowance in the 2014-15 tax year is £40,000.
Changes to the annual allowance
From 6th April 2015, the annual allowance will be reduced to £10,000 if you have withdrawn more than the 25% pension commencement lump sum (PCLS) from your defined contribution pension pot. If you’re currently drawing down pension benefits using flexible drawdown, or you exceed the income limit for capped drawdown, you will also receive an annual allowance of £10,000 from 6th April 2015.
Pension input period
The annual allowance applies to the total pension contributions made to your scheme(s) and/or benefits built up over a period called the pension input period that ends during the tax year. A pension input period normally lasts for one year, but doesn’t necessarily cover the same dates as a tax year.
Your pension provider or scheme administrator should be able to give you your pension input amount for that scheme. This refers to the amount of contributions or value of accrued benefits during the pension input period. If you think that you may be getting close to your annual allowance, or may have exceeded it, you may wish to consider taking advice from an independent financial adviser.