Pension contribution limits relaxed

pension contributions

Pension contribution limits relaxed

The annual allowance (AA) caps the amount of tax-relievable pension inputs that can be made to a registered pension scheme.


 For money purchase (defined contribution) schemes (which include all personal pensions). The inputs are the total amounts contributed by you and your employer. In a defined benefits scheme ( one where the  benefits you will receive are based on your final salary). The inputs are not the cash contributed to the scheme. Instead, there is a much more complicated way of determining the inputs.

 This is based on the increase in the member’s benefits that has accrued in the year. Thus, with benefits based on salary, a relatively small increase in earnings can lead to a high pension input. In his Spring Budget the Chancellor raised the AA to £60,000. If that pension annual allowance isn’t fully used, you can carry forward the excess for up to three tax years.

high income savers

For high income pension savers, the AA gets restricted. However, this restriction has also been relaxed and does not now apply until income goes above £260,000. Some taxpayers with substantial pension pots worry that they will be taxed at 55% when they start to access their pension savings, but this penalty tax charge has now been removed.

 There is no limit on the amount of savings you can shelter from tax within your pension fund, although the pension benefits are taxed at your marginal tax rate when you take them, subject to the 25% tax-free lump sum (which for most people is capped at £268,275). It is also easier to carry on making pension contributions once you have started to access any defined contribution pension benefits. If benefits over and above the tax-free lump sum are taken from such a scheme (other than by buying a pension annuity), the normal £60,000 AA is not available.

 Instead, the money purchase annual allowance (MPAA) applies, which has been increased from £4,000 to £10,000. For example, you could draw benefits from one pension pot and continue to pay up to £10,000 per year into another scheme. Before deciding how or when to take your pension benefits. Or how much you should contribute to your pension scheme, be sure to take independent financial advice. We are thoroughly  happy to explain what are often very complicated tax rules to you.