Pension contribution rules.
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.
Member contributions are paid net of basic rate income tax. Employer contributions are paid gross: there is no specified limit on the amount an employer can pay in.
If the total value of contributions in a tax year to a Member's Plan and any other registered pension schemes (including benefit increases in defined benefit schemes where relevant) exceed the Member's available annual allowance, tapered annual allowance or money purchase annual allowance, whichever is/are applicable, a tax charge will apply.
What is the pension annual allowance?
Contributions/inputs to registered pension schemes are also restricted by the member's available annual allowance in the tax year. From the tax year 2023/2024 the annual allowance has effectively been £60,000. 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).
More on carry forward
What is the lifetime allowance (LTA)
To help prevent some members being disadvantaged by the lifetime allowance, a number of forms of lifetime allowance protection had been available since the concept was introduced in April 2006 and following changes to the level of the standard lifetime allowance since then.
More on the lifetime allowance
Can the pension annual allowance be reduced?
For tax year 2023/24 if an individuals adjusted income is over £260,000 their annual allowance could be reduced to as much as £10,000. Adjusted income includes the individuals' earnings, dividends, interest on savings and pension contributions (both member and employer).
What is the 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**' exceeds £260,000 in a tax year. Members with an adjusted income of £360,000 or more will have a tapered annual allowance of £10,000 gross.
This allowance will not apply if a members 'threshold income**' is £200,000 or less even if they had adjusted income of £260,000 or more. The minimum tapered annual allowance has varied in the tax years since its introduction.
For the tax year 2023/24 onwards, the adjusted income limit increased to £260,000 and the threshold income limit remained at £200,000. The minimum tapered annual allowance increased from £4,000 to £10,000 per annum, meaning that someone subject to the tapered annual allowance will have a minimum annual allowance of £10,000, regardless of their adjusted earnings. This means members with adjusted income in the tax year of £360,000 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 is £200,000 or less even if they have adjusted income of £260,000 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.
What is the money purchase annual allowance?
The money purchase annual allowance (MPAA) was introduced to prevent the abuse of the new pension freedoms that were introduced in April 2015. The money purchase annual allowance is currently £10,000 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.