A pension is a tax-efficient, long-term savings plan that you contribute to during your working life to provide an income when you stop work. You can benefit from tax relief on the contributions you pay in and your pension pot has the potential to grow.
At the moment you can save up to £40,000 every year into your pension. However, tax relief will only be given on 100% of your earnings or £40,000, whichever is the lower. This will differ if the reduced Money Purchase Allowance applies, or if your salary exceeds £150,000 (explained below).
What if…
…your “adjusted income” is over £150,000?
Broadly speaking, adjusted income is your total taxable income (including salary, dividends, rental income and savings interest) plus the value of any employer pension contributions. If this exceeds £150,000 your annual allowance could be lower than £40,000. Here’s why:
For every £2 of adjusted income over £150,000, your annual allowance falls by £1. If your adjusted income is £210,000 or more, your annual allowance is fixed at £10,000.
…you want to contribute over £40,000 this tax year?
Some higher earners can contribute up to £160,000 by ‘carrying forward’ unused annual allowance from the previous three years. Please ask for our guide which helps explain the rules around Pension Carry Forward.
…you’re a member of a defined benefit (final salary) pension scheme?
The benefits you’re building up each year are assigned a monetary value. This value counts towards the annual allowance and could therefore restrict what you can contribute to another pension. You need to contact your pension administrator and ask for this value.
…you’ve already accessed your pension?
Since 6 April 2015, if you have accessed a pension or had flexible drawdown before, a reduced money purchase annual allowance may apply. This is £4,000 for the 2018/19 tax year. You cannot use Pension Carry Forward option to contribute more than the money purchase annual allowance.
The actual amount you can pay into your pension each tax year for tax relief purposes is the greater of: A gross contribution of £3,600, or 100% of your earnings which is capped at £40,000
Subject to certain conditions this is the annual allowance for most people.
We can help you achieve a tax-efficient financial plan by providing advice that’s based on a thorough understanding of your personal circumstances and goals.
Please get in touch with us to find out more.
This information is based on our current understanding of the rules for the 2018/19 tax year. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The value of investments and any income from them can go down as well as up and you may not get back the original amount invested