What is the pension annual allowance?

Your annual allowance is the most you can save in your pension pots in a tax year before you pay tax on your income. You’ll only pay tax if you go above the annual allowance.  From 6 April 2023 the annual allowance increased from £40,000 to £60,000. The annual allowance applies across all your pensions, not per pension pot. If you exceed it, a tax charge is made, which takes back any tax relief.

Lifetime annual allowance

As of 6 April 2024, the government will abolish the pension lifetime allowance. 

Lifetime allowances are limits set by HMRC on how much you can build up in a pension scheme and still benefit from tax relief. However, there are restrictions on how much you can contribute each year, which is currently £60,000.

The old limit of £1,073,100 will be abolished, and the tax-free maximum lump will be frozen at £268,275. Anything above this amount will be taxed at the marginal rate. 

What counts towards the annual allowance?

If you have enough unused allowance, you can carry forward the allowance from the three previous years.

All contributions to your pension pot, including any your employer makes, count toward your annual allowance. If you think you may be nearing the limit, then it is a good idea to keep track of your contributions.

If you go over your annual allowance, you won’t receive tax relief on the excess amount, and you will face an additional tax bill. Excess contributions are added to your income tax bill, meaning your tax is recalculated using this figure.

If the charge is more than £2,000, you can ask for it to be deducted from your pension benefit instead; this is known as ‘Scheme Pays’ and means your pension would be reduced.

What should I do if I am nearing my allowance?

If you think you may be getting close to the annual allowance or that you might have exceeded it, then it's always a good idea to get help from a financial advisor.

An advisor can help you understand your annual allowance, including any unused amounts you may have. There may also be options to reduce any potential charges, and they can look at your options for paying any tax charges due.