Annual allowance

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The annual allowance is set by the government. It limits the benefits you can build up in defined benefit pension plans, and the total contributions you can pay into your defined contribution plans, each tax year. This is for the purpose of calculating your tax relief.

For 2020/21, the annual allowance is £40,000.

You can build up benefits in excess of this amount, but you may be liable to pay a substantial tax charge.

If you have accessed pension benefits already (from any pension plan, not just this one), you may have a lower annual allowance called the 'Money Purchase Annual Allowance'. For 2020/21, this is £4,000.

 

 

  • The tapered annual allowance

    If your total taxable earnings, plus the value of your and your employer's pension contributions over a year, are more than £150,000, your annual allowance will start to reduce in line with your earnings.

    So, for every £2 you earn over £150,000, your annual allowance will reduce by £1. This means the amount you can pay into your pension plan without paying a tax charge may be less than you think.

    If you earn £210,000 or over including your pension contributions, your annual allowance will be £10,000 and will not reduce any further than that.

    This is an incredibly complex area and so if your earnings are in this band please speak to your accountant or a specialist pension adviser.