Tax limits

There are limitations on the amount of tax-relieved pension savings you can have, known as:

The Annual Allowance (AA) is a limit to the total amount of contributions that can be paid to defined contribution (DC) pension schemes and the total amount of benefits that you can build up in defined benefit (DB) pension schemes each year, for tax relief purposes.

The AA was initially set at £225,000 pa in 2006 and whilst it steadily increased for several years, then more recently reduced, it is currently capped at £40,000 although a lower limit of £4,000 may apply if you have cashed out a DC pension under the new pension freedoms introduced in April 2016. You should have been advised by the Scheme paying the pension lump sum to you if this reduced AA (referred to as the ‘Money Purchase Annual Allowance’) applies to you going forward.

In addition, your Annual Allowance may also be reduced if you have ‘Adjusted Income’ of over £240,000 (referred to as the ‘Tapered Annual Allowance’), but the complicated rules mean those earning less may also be affected. Please see the tab below for further information on the Tapered Annual Allowance.

The AA applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all pensions savings that you, your employer, and anyone else make on your behalf. If you exceed the AA in a tax year you will be liable for an Annual Allowance tax charge on the value of the excess. In addition, if you have paid any DC or AVC (Additional Voluntary Contribution) type contributions you won't receive tax relief on those deemed to have exceeded the limit.

You may, however, be able to bring forward any unused Annual Allowances from the previous three tax years, to help reduce the Annual Allowance charge.

The HMRC have introduced a new Annual Allowance calculator which is available on their website at https://www.tax.service.gov.uk/paac

From 6 April 2020, if your ‘Adjusted Income’ exceeds £240,000, then your Annual Allowance will be gradually reduced from £40,000 to £4,000, with £1 of allowance lost for every £2 of Adjusted Income over £240,000 (in a similar fashion to the reduction of the personal allowance on earnings over £100,000).

Adjusted Income takes into account all taxable earnings but adds in the value of pension savings made during the year.

To calculate Adjusted Income, take your total taxable income (i.e. all income such as salary, bonus, P11D benefits, interest on deposits, dividends, rental income etc.) less any items allowable for tax relief (such as pension contributions, charity donations etc.), and add to this the total value of pension savings in that year i.e. the increase in total value of any DB benefits plus any DC type contributions (including AVCs).

Here are a few simple examples:

Diana has total taxable income of £300,000. Diana’s total increase in DB savings for the tax year is £35,000 and she pays no AVCs or contributes to pensions outside of ABF. Therefore, Diana’s ‘Adjusted Income’ is £335,000 i.e. £300,000 + £35,000. Diana’s tapered Annual Allowance is £4,000 i.e. £40,000 - (£335,000 - £240,000) / 2 subject to a minimum of £4,000

Eileen has a taxable income of £225,000. Eileen’s total increase in DB savings for the tax year is £27,500 and she pays no AVCs or contributes to pensions outside of ABF. Therefore, Eileen’s ‘Adjusted Income’ is £252,500 i.e. £225,000 + £27,500. Although Eileen’s taxable income is less than £240,000, her Adjusted Income is in excess of £240,000. So, Eileen has a tapered Annual Allowance of £33,750 i.e. £40,000 - (£252,500 - £240,000) / 2

As you can see, this new definition of Adjusted Income means those with taxable income below £240,000 may be affected if the value of their pension savings takes the total to more than £240,000.

However, only those with ‘Threshold Income’ (another new term that describes taxable income ignoring the increase in value of pension benefits) above £200,000 will be affected. Anyone with ‘Threshold Income’ below £200,000 will be unaffected and will retain their Annual Allowance of £40,000.

HMRC have produced a calculator to assist pension scheme member with calculating their Tapered Annual Allowance, this can be found on their website at www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance#adjusted.

The Lifetime Allowance (LTA) is the maximum amount you can take in pension benefits during your lifetime from all pension schemes before an additional tax charge is incurred. If the LTA is exceeded, you will be subject to the LTA tax charge. It is unlikely for the majority of members that the LTA will be exceeded, therefore no charge would apply.

The LTA was initially set at £1.5m in 2006 and has steadily changed in recent years. From April 2018 it has increased in line with the rate of inflation, as measured by the Consumer Price Index (CPI). The government has announced that for tax years 2021-2022 to 2025-2026, the LTA will be frozen.

Retirement Date

Lifetime Allowance

6 April 2014 to 5 April 2016

£1.25 million

6 April 2016 to 5 April 2018

£1 million

6 April 2018 to 5 April 2019

£1.03 million

6 April 2019 to 5 April 2020

£1.055 million

6 April 2020 to 5 April 2026

£1.0731 million

From 6 April 2026

To be confirmed

In practice, the tax rules are far from simple and we strongly recommend that you seek financial advice if you believe you are affected by the tax relief limitations on your pension savings.

The Group Pensions Department is not allowed to give you advice about your personal tax position. You could seek advice from a financial adviser, you can find information on financial advisers by visiting www.unbiased.co.uk