Your pension annual allowances have reset

Edward Willday

2 mins

On April 6th, the new financial year began, and your tax-free pension allowance reset. When it comes to saving for retirement, understanding your pension allowances is key to making the most of your hard-earned money. In this article, we’ll explain what your pension annual allowance is, about tax relief and how to maximise your pension contributions.

An older lady and gentleman standing on a grass scene with blue sky background, with their hands behind their backs

What are pension annual allowances?

Pension annual allowances are the limits on how much you can contribute to your pension each year whilst benefitting from tax relief. For most people, the current annual allowance is £60,000. The annual allowance encompasses all your pensions, including all private pensions you pay into, plus any workplace pension you’re currently paying into. However there are a few things to keep in mind:

Income cap

The Annual Allowance is capped at 100% of your ‘relevant earnings’. So, if you earn £50,000 per year, your maximum you can contribute to a pension in any given tax year and still receive tax-relief would be £50,000. Relevant earnings are the types of income that count toward the annual allowance for tax-relievable pension contributions, typically including salary, bonuses, commissions, and profits from self-employment. Income such as rental income, dividends and savings interest does not count towards relevant earnings for the purpose of tax-relievable pension contributions.

Carry forward

If you haven’t used up your full annual allowance in the past three years, you can carry forward any unused allowances to the current tax year. This can be a great way to boost your pension savings if you have more disposable income one year that you’d like to invest in your pension. If you are considering this, reach out to our team and one of our advisers will run through a carry forward calculation with you.

Money Purchase Annual Allowance (MPAA)

If you’ve already accessed your flexible pension pot beyond the 25% tax-free lump sum, your annual allowance might be reduced to £10,000 regardless of your income. This is known as the Money Purchase Annual Allowance (MPAA). This prevents you from drawing money from your pension and then recycling it back in to benefit from additional tax relief.

Tapered annual allowance

Your ‘adjusted income’ is the total amount of your income plus your employer’s contributions to your pension. Your ‘threshold income’ is your income amount less your pension contributions. If your adjusted income is over £260,000 and your threshold income is over £200,000, you’ll usually have a tapered annual allowance. For every £2 of adjusted income you earn above £260,000, your allowance is reduced by £1, down to a minimum of £10,000.

The Lifetime Allowance

You may have heard of the pension Lifetime Allowance (LTA); this was a £1,073,100 limit on the total amount you could take out of your pension pot. As of 6th April 2024, the LTA has been abolished, meaning there’s no longer a tax charge applied to pension withdrawals that exceed this amount. The removal of the LTA presents a fantastic opportunity for those with substantial pension savings. However, it’s important to note that your pension benefits may still be subject to Income Tax when you withdraw them.

A pile of UK pound coins and £2 coins

Tax Relief on pension contributions

Contributions into your pension, within your annual allowance, will receive tax relief*. If you’re a basic rate taxpayer, you’ll receive 20% tax relief on your pension contributions. For example, a £100 pension contribution costs you just £80 due to a £20 tax relief being applied.

Higher and additional-rate taxpayers can claim an additional 20% tax relief through self-assessment tax returns. This means that for higher rate taxpayers, a £100 pension contribution will cost you just £60. For additional rate taxpayers it will cost you just £55. Understanding tax relief on pension contributions can help you maximise your savings.

Maximising your pension contributions

As well as taking advantage of tax relief, there are additional ways to maximise your pension contributions.

Start early

The earlier you start saving, the more time your money has to grow. Pensions are a long-term investment, so the longer your money has to work hard for you, the better. Even small contributions can add up significantly.

Use carry forward

As mentioned above, carry forward allows you to bring unused annual allowances from the three previous years into this year. This will boost your contributions in the current tax year, and allow you to boost your pension pot considerably. If you have the capital available, making a carry forward contribution can really make a difference to your retirement plan.

Review regularly

Your financial situation can change as can the investment market. So, it’s important to review your pensions and contributions regularly. If your income increases, you might be able to increase your contributions, and your pension pot significantly. Monitoring changes in the economy and their impact on your pension pot will allow changes to be made where necessary.

An illustrated jar with a lid on and coins in. A label says Retirement. The jar has a yellow background.

How Willday Wealth Management can help you

Pension rules can be complex, and the changing global economic situation can exacerbate this. Working with experts such as the team at Willday Wealth Management will help you navigate the rules. We’ll ensure you’re optimising your pension savings, and will monitor and make adjustments to your pension investments as needed*.

If you are looking to transfer your pension to another provider, Willday Wealth Management are happy to help! We can also handle the process of combining multiple pension pots, if this is a service you require. We’ll talk to your existing provider and manage the whole process for you, from start to finish.

Making sufficient pension contributions and effective use of your allowances are an absolutely crucial part of your retirement planning. Whether you’re just starting out with pension saving or have been growing your pension pot for years, it’s important to stay informed and proactive with your pension planning. Remember, if you ever feel unsure or overwhelmed about your pension, we’re here to help. We’ll work with you to navigate the path to a secure and happy retirement.

* Please note: With investing, your capital is at risk. You may get less than what you invested. Tax treatment depends on our individual circumstances and may change in the future.