UK households with pensions are being impacted by a £60,000 limit imposed by HMRC. Your annual allowance is the maximum amount you can save into your pension pots during a tax year (6 April to 5 April) before you become liable to pay tax.
Understanding the Annual Allowance
You will only pay tax if your contributions exceed the annual allowance, which is set at £60,000 for the current tax year. This allowance applies to all your private pensions combined, even if you have multiple pots.
The total includes any contributions made by you or others (such as your employer) into a defined contribution scheme, as well as any increase in a defined benefit scheme during the tax year.
Carry Forward and Reduced Allowances
You may be able to carry forward any unused annual allowance from the previous three tax years. However, your annual allowance could be lower if you have flexibly accessed your pension pot or have a high income.
If you flexibly access your pension—for example, by taking cash or a short-term annuity from a flexi-access drawdown fund, or by taking cash from a pension pot (uncrystallised funds pension lump sums)—you may be subject to a lower allowance known as the 'money purchase annual allowance'.
Tapered Annual Allowance
You will have a reduced (tapered) annual allowance in the current tax year if both your 'threshold income' exceeds £200,000 and your 'adjusted income' exceeds £260,000. Note that the threshold and adjusted income limits differ for earlier tax years.
Your pension provider will send you a statement if you exceed the annual allowance in their scheme. If you are a member of multiple pension schemes, you should request statements from each provider. If you go over your annual allowance, either you or your pension provider must pay the tax, according to HMRC rules.
