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The short answer is however much you want. Although as with any personal finance query, there are a few quirks you should know if you want to take full advantage of pension tax relief.  

What is tax relief anyway? 

The government rewards people for investing into their pension. That reward takes the form of tax relief, and means a part of the income you otherwise would’ve paid in income tax goes into your personal pension pot instead.  

The level of tax relief you’re entitled to is based on the highest rate of income tax you pay: 

Basic-rate = 20%  

Higher-rate taxpayers = 40%  

Additional-rate taxpayers = 45%   

What can I claim tax relief on?  

It depends. In simple terms, you can only claim tax relief on pension contributions up to 100% of your ‘relevant earnings’ or £40,000 – whichever is lower. ‘Relevant earnings’ usually include salary and any bonuses, but not dividend income or rental income.  

If, for example, you earn £35,000 and you contribute £45,000 to your pension – after dipping into your savings, say – you’ll only get tax relief on £35,000. Alternatively, if you earn £45,000 and contribute the same amount to your pension, you’ll only get tax relief on the first £40,000.  

That £40,000 cap is known as the annual allowance. It  includes all contributions made by you, your employer, or anyone else who pays into your pension(s), as well as any tax relief you receive from the government. 

It also applies across all pensions you have — it’s not a ‘per pension limit’ and does not apply to pension transfers. 

Find out more about  pension tax relief. 

As well as an annual allowance, there’s also a ‘lifetime allowance’. This is the limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and that can be paid without triggering an extra tax charge. As of the 2019-20 tax year, the lifetime allowance is £1,055,000. 

The potential tax charge varies depending on whether you receive the money from your pension as a lump sum or as part of your regular income.   

Anything you take over the lifetime allowance as a lump sum is taxed at 55%. Any amount over the £1,055,000 allowance and taken as regular income will incur a lifetime allowance charge of 25%, on top of any income tax. 

Can my annual allowance ever be reduced?

Yes. Although your annual allowance is based on your earnings for the year and is capped at £40,000, a lower limit of £4,000 may apply if you’ve already started taking your pension. 

For high earners with ‘adjusted income’, things become a little more complicated.  

‘Adjusted  income’, or ‘adjusted net income’, is your total taxable income before any personal allowances and tax reliefs. Examples include: 

  • trading losses 
  • donations made to charities through Gift Aid 
  • pension contributions paid before tax relief 
  • pension contributions where your pension provider has already given you tax relief at the basic rate 

If you have ‘adjusted income’ of more than £150,000, your annual allowance for that same tax year will be tapered, which means that it will reduce depending on your earnings.  

For every £2 of adjusted income over £150,000, your annual allowance decreases by £1. The minimum annual allowance is £10,000. However, if your ‘threshold’ income for that tax year is £110,000 or less, your annual allowance won’t be reduced. 

Find out how to  calculate your tapered allowance.  

What can I carry forward? 

You can carry forward any unused annual allowance from the three previous tax years. However, the tax relief that you get will be limited to your relevant earnings for the current tax year.  

Find out more about  using carry forward for your pension

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.