The total amount you can normally pay into your pension without facing a tax charge is known as the pension annual allowance. The annual allowance is set at £40,000 each tax year however this is subject to change and has been significantly cut over the past few years.
Although the maximum pension contribution on which tax relief can be claimed in any one year is £40,000, if funds are being withdrawn under a flexible drawdown arrangement, then the limit reduces to £4,000. This is intended to stop people recycling funds by claiming tax relief twice on the same contribution.
In order to qualify for tax relief, the maximum personal contribution must not exceed 100% of pensionable earnings, though employer contributions would permit this limit to be exceeded. Depending on your total income, your annual allowance could drop to as little as £10,000 a year if your total income is more than £150,000.
Carry Forward
Provided that the annual allowance for pension contributions has been used in full in any one year, it is permitted to carry forward any unused allowance from up to three previous years. The oldest unused relief must be carried forward first, and no allowance can be carried forward from years in which the scheme member was not a member of a registered pension scheme.
Pension Lifetime Allowance
The maximum sum which can be saved in a pension scheme over the course of a lifetime without incurring tax charges is currently £1 million. This limit has also been significantly reduced over the last few years, however, in the same way as with previous reductions in the lifetime allowance, it has been possible, within strictly defined limits, to preserve larger sums by previously applying to HM Revenue & Customs for protection.
Money Purchase Annual Allowance (MPAA) aside, reductions in both the annual pension contribution allowance and the lifetime allowance have curtailed the use of pensions as a savings medium. However, there may be an opportunity to pay contributions to the scheme of a spouse or civil partner or cohabitee.
The person benefiting from the third-party contribution will receive tax relief against their total earnings up to £40,000 p.a. and up to £3,600 if they have no earnings.
If the contribution is made on behalf of the scheme member it will be regarded as a gift for the purposes of inheritance tax (though exemptions are often available). But if cash is given to enable a spouse or civil partner to pay their own contribution, this will constitute an exempt transfer for Inheritance Tax.
How Nelsons Can Help
For more advice or information on managing your pension annual allowance, please contact a member of our Investment Management team on 0800 024 1976 or contact us via our online form.