Tax on your pension contributions
Usually, you don’t pay tax on contributions you make to your pension. However, the Government sets some limits on the amount of money you can save into your pension(s) without paying tax. It is your responsibility to check if you’re exceeding these allowances and make sure you pay any charges.
We have summarised the allowances below but you can find more on the Government website.
The Annual Allowance
The Annual Allowance (AA) is the maximum amount of money you can pay in to all your pension arrangements in one tax year before incurring a tax charge.
For the 2023/24 tax year, the Government set the standard AA at £60,000. Your AA might be lower if:
- flexibly accessed your pension pot
- a high income
For more information, visit the Government website.
If you exceed the AA, then you may have to pay tax on any contributions made over this limit. If you have not used all your AA in the preceding three tax years, then you can carry forward any unused allowance into the current tax year to increase your AA for the current year.
Tapered Annual Allowance
For the 2023/24 tax year, the Tapered Annual Allowance (Tapered AA) affects anyone earning over £200,000 a year (before tax, excluding any deductions like pension contributions) or £260,000 a year (before tax, including deductions).
This allowance sees your Annual Allowance reduced by £1 for every £2 you earn over the limit. The minimum that your Annual Allowance can be tapered to is £10,000 a year.
For more information, visit the Government website.
Lifetime Allowance
Up until April 2023, there was a Lifetime Allowance to consider. The value of your pension benefits taken at retirement was assessed against the Lifetime Allowance, or Personal Lifetime Allowance, and, if the value of your benefits exceeded the allowance, there was a tax charge on the excess.
The LTA tax charge was not enforced from April 2023, and will be removed completely from April 2024. Please keep in mind that, for most people, the amount you can take as your tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100.
Visit the Government website for further information.