PENSION CONTRIBUTION LIMITS: Despite having an annual allowance threshold, you can carry over unused allowances from previous years.
That means you can top up your allowance for the current tax year (6th of April to 5th of April). You can apply any that you did not use from the previous three (3) tax years.
The annual allowance for the tax years between the 6th of April 2011 and the 5th of April 2014 was £50,000.
But, the tax year 6th of April 2015 to 5th of April 2016 got divided into 2 separate periods. Each period had a different tax-free allowance.
The period 6th of April 2015 to 8th of July 2015 was the ‘pre-alignment tax year’ with £80,000 annual allowance. But, the period 9th of July 2015 to 5th of April 2016 was the ‘post-alignment tax year’ with zero allowances.
Up to £40,000 of unused allowance from the pre-alignment year can carry over to the post-alignment year. It can get added to any unused allowance between 6th of April 2014 and 5th of April 2017.
The pension annual allowance threshold for the tax years 2016 to 2017 and 2017 to 2018 was £40,000.
Note: Use the pension annual allowance calculator to find out if any can get carried forward.
Money Purchase Annual Allowance
A lower allowance gets applied if you take money out of a pension pot. It is possible to keep paying money in after you take money out. But, any pension contribution payments over £4,000 a year may be liable for tax.
The reason for this is that the annual allowance drops to £4,000 for all defined contribution schemes. Once you take money from your pension pot the rate drops in the first full tax year.
Financial advisers might call the lower allowance the ‘money purchase annual allowance‘. Even so, it cannot get topped up with unused allowance from any previous years.
The money purchase annual allowance for the ‘pre-alignment tax year’ (6th of April to the 8th of July 2015) is £20,000.
There is no set money purchase annual allowance for the ‘post-alignment tax year’ (9 July 2015 to 5 April 2016). But, £10,000 of the allowance can get brought over from the pre-alignment year.
Withdrawals that make the Annual Allowance Drop
Taking any of these kinds of withdrawals from a defined contribution scheme will make the annual allowance drop:
- Cash or a short-term annuity from a flexi-access drawdown fund.
- Cash from a pension pot (‘uncrystallised funds pension lump sums’).
- Anything above the limit of a capped drawdown fund.
There are several other situations that can make it drop to £4,000. If it happens you would get a ‘flexible access statement’ from your pension provider.
Note: A drop in the allowance for one of your pension pots to 4,000 means you must inform other pension schemes you are in within 13 weeks.
Going over the Lower Allowance
The annual allowance also drops lower to £36,000 for all defined benefit pension pots. But, as a rule can top this up with any unused allowance from the three previous tax years.
Going over the pre-alignment tax year allowance of £20,000 means the defined benefit pensions change to £60,000 for that year. Up to £30,000 of this can carry over.
The rules get a little complicated at this point. It is best to speak with pensions professional or a tax agent.
There is no set allowance for defined benefit pensions for the post-alignment year. But, you can carry over the allowances from the three previous tax years.
Tapered Annual Allowance for High Incomes
The rules on reduced annual allowance for high incomes changed in April 2016. You will get a reduced ‘tapered’ annual allowance if both these apply to you:
- The ‘threshold income‘ is over £110,000. This relates to income excluding any pension contributions. An exception would be if they get paid as a salary sacrifice by your employer.
- The ‘adjusted income‘ is over £150,000. This relates to income added to any pension contributions made by you or by your employer.
HMRC Annual Allowance Checker
There is a way to check how much annual allowance you have used. You are going to need your pension statements to work out the annual allowance used in a tax year. Thus, you may need to contact your pension provider for the statements.
- Check your statements for the ‘pension input periods’ that ended during the tax year.
- Calculate how much annual allowance you used in those particular pension input periods. The type of pension schemes you have determine what will count towards the allowance.
You will need to perform this check for all the pension schemes you belong to. The total from all schemes shows how much annual allowance got used up.
Note: The definition of pension input periods is the term over which you measure pension savings. They now run for a year starting the 6th of April to the next 5th of April.
- Defined Contribution Pension Schemes (e.g. personal, stakeholder and most workplace schemes). Total amount of contributions paid in by you or anyone else (including your employer and the government) counts towards the annual allowance.
- Defined Benefit Schemes (e.g. some workplace schemes). Any increase in the amount your pension provider promises to give you when you retire counts towards the annual allowance.
- Hybrid Pension Schemes. The higher amount out of total contributions and any increase in the amount your pension provider promises to give you when you retire counts towards the annual allowance.
Tax Charge for Exceeding Annual Allowance
Your pension provider will send you a statement to inform you if it goes above the annual allowance. You may need several statements if you have more than one pension scheme. That is the only way to work out how much you are above the allowance.
You will need this information to fill in a Self Assessment tax return. Select the section ‘Pension savings tax charges’. If you use paper forms you will need to use form SA101.
HM Revenue and Customs do not always make a tax charge for going over the annual allowance in a tax year. The exceptions include a death or a retired person who took all their pension pots due to serious ill health.
Note: HM Revenue and Customs use Self Assessment tax returns to work out how much Income Tax is due. You can still claim tax relief on private pension contributions using your Self Assessment tax return if you go above the annual allowance.
Tax is over £2,000
What if you have gone over the annual allowance and the tax charge is higher than £2,000? In this case, you can ask your pension provider to use money in your pension pot to pay HMRC.
Inform the pension provider before the 31st of July if you want them to pay tax charges for any previous tax year. Even so, you must still fill in a Self Assessment tax return.
Note: What if you are paying tax because you went over the lower allowance of £10,000? Your provider can only pay it from your pot if you would have paid more than £2,000 tax based on the full annual allowance of £40,000 (plus unused allowance from the 3 previous tax years).
The amount above the annual allowance gets added to taxable income. Thus, you would pay Income Tax on taxable income at the current Income Tax rates that apply to you.