A Guide to The Pension Annual Allowance
Pension Annual Allowance defines the maximum amount you can contribute to your pension funds each year while still benefiting from tax relief. If you are keen to understand more clearly how to calculate the Allowance, its impacts, and some tactical approaches for maximising your retirement investments, read on as the Harpur Wealth Management team navigates this complex terrain.
What is the Pension Annual Allowance?
The Pension Annual Allowance is the sum that individuals can pay to pension funds annually, and still receive tax relief. In April 2023 the annual allowance was raised to £60,000 from £40,000 for most UK earners.
As tax relief is available only on 100% of income, anyone earning less than £40,000 will only get tax relief up to the amount they earn.
For high earners, with an income above £200,000, the annual allowance will be tapered and could be reduced to a sum of £10,000.
The Pension Annual Allowance applies to the combined contribution to ALL private pensions. If, for example, you have a workplace pension and a personal pension, the allowance would need to be split between the two.
What If I Exceed The Annual Allowance?
There are two consequences you’ll face for exceeding the annual allowance. First, you won’t enjoy tax relief on the excess amount you’ve paid. Second, you’ll be required to pay an annual allowance charge. The excess will be added to your gross income for the year, and your income tax will be recalculated based on the Income Tax rates you would normally pay. If the charge exceeds £2,000 you may be able to subtract it from your pension benefits instead.
Calculating Your Annual Pension Allowance
For a defined contribution pension scheme, the Pension Annual Allowance is a fairly uncomplicated calculation. It includes the total amount deposited into your pension, which covers contributions from you, your employer, or anyone contributing on your behalf. This sum also considers the basic-rate tax relief that has been added.
If you pay into a final salary scheme the calculation is more complex because you will need to know the value of your pension at the opening and closing of the tax year. In order to make this calculation, you will need to know:
- Your pensionable earnings at the opening and close of the tax year.
- The number of years you have already contributed to the pension.
- Your pension scheme’s accrual rate.
- Any inflationary increase the pension fund applied to your pension.
It is normally the case that a financial advisor would need to make this calculation for you.
Am I Able to Carry Forward My Allowance?
The pension carry forward rule means that you can benefit from unused annual allowances from the previous years, by adding them to your current allowance. You are able, therefore, to enjoy tax relief on pension contributions over and above the £60,000 limit. In order to take advantage of the carry forward rule, though, your earnings will need to be equal to the amount you are planning to contribute.
Two Tax Planning Strategies For Higher Earners
At Harpur Wealth Management we advise high earners on ways in which they can manage their Pension Annual Allowance. These are two of the strategies we may consider in broad terms, although each client would be offered bespoke advice, based on their specific circumstances:
1. Boost Loved Ones’ Savings By Contributing to Their Pension/ISA
If you’ve exhausted your own allowances, consider adding to a loved one’s pension or ISA. This could be a spouse, civil partner, or child. You will need to ensure that in doing so, they remain within their annual limit.
ISAs usually have a £20,000 annual limit; pensions can go up to £60,000 or match earnings if lower. Junior pensions usually allow £3,600 (with tax relief), while Junior ISAs can hold up to £9,000.
2. Maximize Your Pension: Employ Unused Annual Allowance
The pension carry forward rule allows you to make the most of previous years’ untapped allowances. You can bring forward up to £40,000 from each of the last three tax years (2022/23, 2021/22, 2020/21).
When added to this year’s allowance, you could potentially contribute a substantial sum to your pension, gaining pension tax relief (provided your earnings meet the criteria). In order to carry forward your Pension Annual Allowance, you must have been part of a UK registered pension scheme in the years you’re carrying forward allowances from.
3. Carry Forward Provision for Directors of Limited Companies
Directors of Limited Companies can make company contributions from which the company benefits by receiving full corporation tax relief. These contributions are subject to the Annual Allowance. The Carry Forward provision allows Directors to utilise unused allowances from previous years, making it a powerful strategy for moving money into their personal finances with no immediate tax implications.
How Can Harpur Wealth Management Help With Your Pension Annual Allowance?
If you are worried about approaching or even exceeding your Pension Annual Allowance, Harpur Wealth Management can offer you specialist guidance. Our advisors specialise in providing valuable insights and assistance to clients wishing to maximise their tax-free benefits.
A wealth management advisor can help you navigate the complexities of your Pension Annual Allowance and advise you on the potential for carrying forward unused allowance from previous years.
At Harpur Wealth we are experts in guiding families, individuals, and businesses through the complex landscape of pensions, investments, insurance, and savings. Our professional team is dedicated to helping you achieve your long-term financial goals. Our services are designed to provide a comprehensive and tailored solution that aligns with your unique circumstances and aspirations.
Would you like to speak to a Harpur Wealth Management advisor about your annual allowance? Call today for a FREE consultation on 01234 924620
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.
The value of your investment can go down as well as up and you may get back less than the amount invested.
The Financial Conduct Authority does not regulate taxation advice.