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Call: 020 8296 1799

MLP Wealth

Planning for your future

Pension contribution limits: What's my annual allowance?

There are two restrictions on how much you can save into a pension and still receive tax relief on your contributions - the annual and lifetime allowances. If you go over these limits you will face a tax charge.

The annual allowance is currently £40,000 a year - but it could be far less if you are a high earner because of the new "taper".

This has applied since April 2016 and sees the amount you can in a year cut the more you earn.

Jessica List, a technical specialist at Sipp firm Suffolk Life, said this was “one of the most complicated things ever introduced around the annual allowance”.

To work out whether you will be affected you need to calculate a “threshold” and “adjusted” income.

If your threshold income is more than £110,000 and adjusted income is more than £150,000 a year you will be caught and start to see your annual allowance drop from £40,000 to a minimum of £10,000.

Threshold income includes income from all sources, not just your salary. Income produced by investments and buy-to-let properties fall within the scope.

The taper is one of the most complicated things ever introduced around the annual allowance

You also have to add any income given up in a salary sacrifice arrangement, used by many employers to lower National Insurance bills, if it was set up after July 8 2015. From this deduct pension contributions you made to personal pensions, such as Sipps, and to workplace pensions.

If you have received a lump sum from someone else’s unused pension on their death, this is not included.

If the figure produced is less than £110,000 there is nothing to worry about – your annual allowance will be £40,000. If it is above, however, you need to calculate adjusted income.

The Government estimates that 300,000 people who save into pensions will be in this situation.

Adjusted income is calculated in much the same way as threshold income but includes the pension contributions that you and your employer make both from gross pay and via salary sacrifice.

If adjusted income totals more than £150,000 the taper applies and your annual allowance will fall by £1 for every £2 of adjusted income between £150,000 and £210,000. For adjusted incomes of £210,000 or more, the allowance will be £10,000.

However, using what is known as “carry forward”, you will be able to claw back some extra allowance if you have some left over from the previous three tax years.  HMRC automatically tops any contributions up by 20pc, but higher and top-rate taxpayers need to claim the extra tax relief through their tax return.

If you have accessed your pension pot using the pension freedom rules introduced in April 2015 your annual allowance is automatically cut to £10,000 and carry forward cannot be used.

However, if you make your withdrawals using a “capped drawdown” plan set up before the freedoms took effect, your limit remains at £40,000.

If you do exceed the limits, HMRC will impose a charge at your marginal rate of income tax.


How much can you save into a pension in a year?

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