Building a future

Member contributions in any tax year on which tax relief may be granted, are restricted to the greater of:

  • £3,600 gross, or
  • 100% of the member's relevant UK earnings for the tax year.
Relevant UK earnings include such things as employment income, self-employed income, income from patent rights, certain redundancy payments and earnings from overseas crown employment.

Annual allowance

Contributions/inputs to registered pension schemes are also restricted by the member's available annual allowance in the tax year. Since the tax year 2014/2015 the annual allowance has effectively been £40,000. This can only be exceeded where the member has unused annual allowance from the three previous tax years that can be carried forward to the current tax year.

Inputs include benefit accrual in a defined benefit scheme or cash balance scheme above a certain amount.

The annual allowance does not apply in the tax year in which a member dies or retires due to serious ill-health (i.e. has been advised by a medical practitioner that their life expectancy is less than a year).

Stephen McPhillips, our Technical Sales Director, answers some typical questions around the annual allowance.

Tapered annual allowance

The tapered annual allowance was introduced on 6 April 2016. It reduced a pension scheme member's annual allowance on a sliding scale for a tax year in which their 'adjusted income*' and 'threshold income**' exceed the relevant limits.

For tax years 2016/17 to 2019/20, the adjusted income limit is £150,000 and the threshold income limit is £110,000. The member’s annual allowance is reduced by £1 for every £2 that their adjusted income exceeds £150,000, to a minimum annual allowance of £10,000. This means members with adjusted income in the tax year of £210,000 or more will have a tapered annual allowance of £10,000. 

The tapered annual allowance does not apply if a member's 'threshold income' for any of these tax years was £110,000 or less even if they had adjusted income of £150,000 or more.

For tax year 2020/21 onwards, the adjusted income limit is increasing to £240,000 and the threshold income limit to £200,000, which will decrease the minimum reduced tapered annual allowance from £10,000 to £4,000. This means members with adjusted income in the tax year of £312,000 or more, will have a tapered annual allowance of £4,000. 

The tapered annual allowance does not apply if a member's 'threshold income' for any of these tax years is £200,000 or less even if they have adjusted income of £240,000 or more.

*Adjusted income includes the member's earnings, dividends, interest on savings and pension contributions (including those made as a result of a salary sacrifice or similar arrangement).

**Threshold income is broadly similar to adjusted income except that pension contributions that entitle the member to Relief at Source and employer contributions resulting from a salary sacrifice (or similar arrangement) made before 9 July 2015 are excluded.

Money purchase annual allowance (MPAA)

The money purchase annual allowance (MPAA) was introduced to prevent the abuse of the new pension freedoms that were introduced in April 2015. The MPAA is currently £4,000 and, apart from a few less common situations, applies where the member:
  • was in flexible drawdown in April 2015, which automatically became flexi-access drawdown from that time
  • takes annual pension income from capped drawdown funds that exceeds their maximum permitted annual capped drawdown pension income (see GAD rates)
  • takes their first payment of flexi-access drawdown pension income from any registered pension scheme*
  • takes their first uncrystallised funds pension lump sum (UFPLS) from any registered pension scheme.
*If the member merely takes their tax-free pension commencement lump sum and defers taking any flexi-access drawdown pension income, the MPAA will not apply.

Lifetime allowance (LTA)

The lifetime allowance (LTA) is the upper limit on the benefits a member can crystallise in all their registered pension schemes without incurring a lifetime allowance tax charge.

To help prevent some members being disadvantaged by the LTA, a number of forms of LTA protection have been available since the concept was introduced in April 2006 and following changes to the level of the standard LTA since then.

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