Pension contributions



How much can I pay into a pension?

The amount you’re able to put into your pension depends on two government-set limits. These two limits are the annual allowance and the lifetime allowance. It’s important to understand these limits and how they apply to you because if you go over them you may have to pay a tax charge.



What is the annual allowance?

The annual allowance is a figure set by the government each tax year, specifying how much money you can contribute to your pensions without incurring any tax charges. For most people, the annual allowance is £40,000 for the 2018/19 tax year. It applies across all the pensions you may have – it is not a ‘per pension limit’.

If you’re a UK taxpayer and under the age of 75, you’re able to get tax relief on pension contributions of up to 100% of your earnings, or on contributions up to the government-set annual allowance, whichever is the lower of the two.

If you’re not working or not earning enough to pay income tax, you’re still able to receive tax relief on contributions you, or anyone else, make to your pension – up to a maximum of £3,600 in a tax year.

It’s important to remember that the annual allowance includes contributions made by you, your employer, or anyone else contributing to your pension. It also includes any government tax relief – so make sure you factor this into your calculations.

The annual allowance does not apply to pension transfers: transferring a pension during the tax year won’t reduce your annual allowance.

If you exceed your annual allowance, you may have to pay an annual allowance charge. This is not at a fixed amount, but depends on your taxable income and the excess contributions you’ve put into your pension. It may also depend on whether you had any unused annual allowance from the previous three tax years.

As with many rules, there are some exceptions to the annual allowance rule.

Your annual allowance may be lower if:

  • your ‘adjusted income’ is over £150,000 per year.
  • your annual allowance will be tapered and reduced, according to your earnings, to a minimum of £10,000.
  • you’ve already flexibly accessed your pension.
  • In these cases, your annual allowance is reduced and you can only contribute up to £4,000 each year.


Can you make pension contributions from previous tax years?

Yes, you can make pension contributions from previous tax years, by using the pension ‘carry forward’ rules.

Carry forward allows you to receive tax relief on any unused portion of your annual allowance from the previous three tax years, as long as you were a member of a pension scheme during those years.

To use carry forward, you must make the maximum allowable contribution in the current tax year – £40,000 in 2018/19 – after which you can then use any unused annual allowances from the three previous tax years.

It’s important to remember that you’re not able to receive tax relief on contributions in excess of your earnings in a tax year and you’ll only receive higher-rate tax relief to the extent you’ve paid the higher rate of tax.

Carry forward may be particularly helpful if you’re self-employed, your earnings can change significantly each year, or if you’re looking to make very large pension contributions.



What is the lifetime allowance?

The lifetime allowance is a set limit on the amount that you can take from all of your pensions without having to pay any extra tax charges. The lifetime allowance is £1,030,000 for the 2018/19 tax year.

Be aware though, the lifetime allowance also includes any growth in your pension through performance of the investments – so it’s based on contributions, tax relief and growth of your investments.

As of the 2018/19 tax year, the lifetime allowance will increase every year in line with inflation. In September 2018, inflation was measured at 2.4% – so the lifetime allowance in the 2019/20 tax year will be £1,055,000.

If you exceed the lifetime allowance, the tax charges you may have to pay will depend on how you take out the excess amounts from your pension:

  • if you take it as a lump sum, you will have to pay 55% on the lump sum amount
  • if you take it as income, you will be pay a 25% charge, plus you will pay income tax at your marginal rate.

Your pension provider should be able to provide projections as to what your benefits might be worth at retirement so that you can plan accordingly.

Because the lifetime allowance has reduced in recent years as a result of pension reforms, in certain instances you may be entitled to apply for ‘protection’ of your pension benefits if the total value is higher than the current lifetime allowance. Find out more about how to protect your lifetime allowance.