Pension Contributions
What is the maximum contribution that can be paid into my pension?
You may contribute to as many pension plans as you want and there is no upper limit on the total contribution that can be paid. However, there is a limit on the amount of personal contribution that can benefit from tax relief, and this is the greater of £3,600 and 100% of your 'relevant UK earnings' which would include self-employed profits, salary, wages, bonuses, overtime and commission.
The amount of employer contributions are unlimited and are not restricted by the employee’s earnings although, in practice, care should be taken to ensure that employer and individual contributions combined do not exceed the annual allowance (including any unused annual allowance that can be carried forward).
What is the annual allowance?
Ignoring any unused annual allowance that may be available to carry forward from the previous 3 tax years, the annual allowance effectively places an annual limit of (currently) £40,000 on the total amount of tax efficient 'pension input' that can be made to registered pension schemes (both occupational and personal) without triggering an annual allowance tax charge.
For high earners with both 'threshold income' over £200,000 and 'adjusted income' over £240,000, however, the normal £40,000 annual allowance will be tapered away at a rate of £1 for every £2 that their ‘adjusted income’ exceeds £240,000, subject to a minimum tapered annual allowance of £4,000 for those with ‘adjusted income’ of £312,000 or more.
What is the money purchase annual allowance?
If you take benefits ‘flexibly’ from a money purchase scheme you will be subject to the Money Purchase Annual Allowance (MPAA) which places a limit of (currently) £4,000 on the total amount of tax relievable pension contributions that can be made by you, or on your behalf, (such as by an employer) to registered money purchase pension schemes during a tax year without incurring a tax charge. The main scenarios that would trigger the MPAA are:
- Taking your entire pension pot as a lump sum or starting to take ad-hoc lump sums from your pension pot
- Moving your pension into a flexi-access drawdown arrangement and taking an income from it; or
- Buying a flexible annuity where your income could go down
Unlike, however, when someone is subject to either the normal £40K AA or the Tapered AA if the £4,000 MPAA is exceeded carry forward (see below) cannot be used to reduce or eliminate a liability to an annual allowance tax charge.
What is carry forward?
With the exception of individuals who are subject to the MPAA (see above) if the current year’s annual allowance is exceeded, members of both defined benefit (DB) and money purchase schemes can carry-forward any 'unused' annual allowance from up to three previous tax years to offset against any pension savings in excess of the annual allowance in order to reduce (or eliminate) a liability to an AA tax charge.
There are, however, a number of conditions that apply to the carry forward rules which can be summarised as follows:
- Carry forward is only available if the individual was a member of a registered pension scheme at some point in the tax year that the unused annual allowance is being carried forward from (even if the pension input amount for that year was nil)
- The annual allowance in the current tax year must be used first before you can carry forward any unused annual allowance; and
- Unused annual allowance can only be carried forward from the previous three tax years, starting with the earliest tax year first
What is the annual allowance tax charge?
Because the effect of the annual allowance tax charge is to cancel-out any tax relief given on any pension savings that exceed the member’s available annual allowance the 'appropriate rate' levied on an individual will depend on the rate(s) of income tax they would pay if the excess amount was included in their ‘reduced net income' for the tax year and treated as the top slice of that income where (broadly) reduced net income is an individual’s gross taxable income from all sources less certain allowable deductions such as the gross amount of their own pension contributions and gifts to charity.
This means though that where the AA is exceeded (after carrying forward any unused AA from the 3 previous tax years) the tax charge for UK (Non-Scottish) taxpayers will be:
- 20% on any part of the excess pension input amount that falls into (or below) the basic rate band
- 40% on any part of the excess pension input amount that falls into the higher rate band; and
- 45% on any part of the excess pension input amount that falls into the additional rate band
What is the lifetime allowance?
A key feature of the post 6 April 2006 (A-day) pension regime is the Lifetime Allowance which places a lifetime limit on the total amount of tax-privileged pension benefits that can built up under UK registered pension schemes without suffering a tax charge when those benefits are crystallised where, broadly, a benefit crystallisation event (BCE) will occur whenever (prior to age 75) an individual is paid a tax-free cash sum, an ‘uncrystallised funds pension lump sum’ or they commence receiving a lifetime annuity, scheme pension or drawdown pension.
Uncrystallised rights on attaining age 75 and death benefits paid from uncrystallised rights following a members death before age 75 which are used to pay a beneficiary a lump sum, annuity or drawdown pension within 2 years of death are also tested against the lifetime allowance.
How much is the lifetime allowance?
There are a number of different forms of lifetime allowance protections (such as primary protection, fixed protection and individual protection) which might increase an individual’s lifetime allowance but the lifetime limit for most people is the Standard Lifetime Allowance.
The Standard Lifetime Allowance is currently £1,073,100 and will be frozen at this level until April 2026 but if an individual's available lifetime allowance is exceeded a Lifetime Allowance Charge is payable on the excess.
How much is the lifetime allowance charge if you exceed your available lifetime allowance on taking benefits before age 75?
If the excess is paid to you as a lump sum the LTA charge is 55% but if the excess is used to pay you an income (annuity or drawdown pension) the LTA charge is 25%. When, however, the excess is taken as an income net of a 25% LTA charge, because the income itself is then subject to income tax at your own marginal rate(s) this means that whilst the ‘effective rate’ of tax is still 55% if you are a 40% higher rate tax payer it will be lower than 55% if you are a basic rate tax payer and higher than 55% if you are an additional rate taxpayer.
How much is the lifetime allowance charge if you exceed your available lifetime allowance on attaining age 75 with uncrystallised pension rights that have not yet been brought into payment?
The excess will automatically be subject to a 25% LTA charge with the balance of the excess remaining in the scheme until such time (if at all) that you subsequently choose to take this as a taxable income. Unlike the situation where the LTA is exceeded during lifetime before age 75, there is therefore no option to take the excess as a lump sum, less 55% tax.
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