Limits on Pension Contributions

Higher earners are now subject to tight limits on how much they can pay into tax-relieved pension schemes and it is essential to take care to avoid a substantial tax charge.

With the tax year coming to an end, this is a good time to review your pension planning. In particular, you should make sure you use up the less restrictive annual allowances for past years before you lose them.

The annual allowance: effectively limits pension contributions. The annual allowance is normally £40,000 if your ‘adjusted income’ is £150,000 or less, but is tapered down – by £1 for each £2 of excess income – to £10,000 for adjusted income of £210,000 or more. Adjusted income consists of all your taxable income before deducting personal allowances, plus the value of certain pension contributions during the tax year, including employer contributions.

If the input into your pension schemes is greater than the annual allowance, you may have to pay tax at your marginal rate on the excess. You will also not receive tax relief on any contributions you make over the allowance. Your pension provider should send you a statement if you go above your annual allowance, but if you are in more than one scheme, you will have to ask for statements for each.

Tapering the annual allowance started in 2016/17. The allowance was £50,000 in 2013/14. £40,000 in 2014/15 and £40,000 in 2015/16. Any unused allowance can normally be carried forward for up to three years. You can only use the annual allowance from earlier years after you have used the current year’s annual allowance.

The lifetime allowance: could also cause you to face a tax charge if you exceed it. The lifetime allowance is £1 million in 2016/17, reduced from £1.25 million in 2015/16. Tax – at 25% on excess benefits taken as income or 55% on a lump sum – will normally arise when you draw pension benefits. If the value of your pension benefits is approaching £1 million, you might have to stop contributing to the plan, or draw your pension early, because investment growth may push the value over the lifetime allowance in the future.

With the lower annual and lifetime allowances it is more important than ever that you take professional advice and we are here to help.