Have you used your pension Annual Allowance? Here’s why you should review it before the tax year ends

When a new tax year starts, your pension Annual Allowance resets. Maximising your allowance could help you reach retirement goals and it can be a tax-efficient way to invest for the long term.

If you haven’t made the most of your allowance and are looking for a way to make your money go further, boosting your pension could make sense.

The Annual Allowance limits how much can be added to your pension each tax year without suffering a tax charge. It covers all pension contributions, including those made by your employer and other third parties. 

For most pension savers, their Annual Allowance is £40,000. However, there are two reasons why your Annual Allowance could be lower:

1. If you’re a high earner, you could be affected by the Tapered Annual Allowance. If your adjusted income is more than £240,000 and your threshold income above £200,000, your Annual Allowance will be reduced by £1 for every £2 your adjusted income exceeds £240,000. It can be reduced by a maximum of £36,000. So, some high earners will have an Annual Allowance of just £4,000.
2. If you’ve already flexibly accessed your pension, you may be affected by the Money Purchase Annual Allowance (MPAA). This reduces how much you can tax-efficiently save into money purchase pensions to £4,000 pa.

Exceeding the Annual Allowance could result in an unexpected tax bill. So, if you’re thinking about boosting your pension before the end of the tax year, you should review the contributions you’ve already made and your allowance. 

You can carry your Annual Allowance forward for up to three years provided you maximise your contributions in the current tax year. So, you have until 5 April 2023 to use your allowance from the 2019/20 tax year.

As well as the annual allowance limit, you should bear in mind that your own tax-relievable contributions are limited to 100% of your earnings (relevant UK earnings) or £3,600 pa if more. So even if you were in a position where you had plenty of unused annual allowances that you could potentially use, you would only receive tax relief on your own contributions up to 100% of your earnings (or £3,600 if more). The 100% earnings limit on tax-relievable contributions doesn’t apply to employer contributions so there can be more scope to make larger contributions for business owners who can make employer contributions through their own limited company. Accountancy guidance is essential. 

If you’re not sure if adding to your pension is right for you, here are three reasons to consider it.

3 excellent reasons to consider maximising your pension contributions 

1. It could help you secure the retirement you want

While it can seem like you have years before you need to start thinking about retirement when you’re working, it’s never too soon to start planning.

Boosting your pension could mean the difference between being able to retire early and having to work for longer than expected. Or it could mean you’re able to live far more comfortably once you stop working.

Using your Annual Allowance now can mean you have more flexibility and security later in life. 

2. Your pension savings are often invested 

Usually, your pension will be invested. As you’ll often be saving over several decades, it can help you build wealth. Historically, investments have typically delivered returns and outpaced inflation. 

So, adding to your pension could be a way to increase your long-term wealth and make the most of your assets.

You should keep in mind that investment returns cannot be guaranteed. The value of your investments can fall and it’s important you choose funds or shares that match your risk profile. If you have any questions about investing, including through your pension, please contact us. 

3. Pension contributions typically benefit from tax relief

Tax relief when contributing to a pension makes it a tax-efficient way to save.

When you add to your pension, tax relief means some of the money you have paid in tax is added to your retirement savings. This is paid at up to the highest rate of Income Tax you pay. So, if you’re a basic-rate taxpayer, every £1 you contribute will increase your pension by £1.25. If you’re a higher- or additional-rate taxpayer, your pension will be boosted even more.

Usually, for personal pension plans where contributions are made via ‘relief at source’ your pension scheme will claim tax relief at the basic rate on your behalf and you make your contributions net of basic rate tax out of your after-tax income. However, if you’re a higher- or additional-rate taxpayer, you’ll need to fill in a self-assessment tax return to claim your full entitlement (or for higher rate, contact HMRC to have a tax code adjustment). Where contributions are made using ‘salary sacrifice/exchange’, full tax relief is received up front with no need to make a claim to HMRC. The same applies if you’re a member of an occupational scheme using the ‘net pay’ method of tax relief.

PensionBee previously estimated that high earners failed to claim £810 million in tax relief in the 2018/19 financial year. 

Do you need to be mindful of the Lifetime Allowance?

As well as the Annual Allowance, the Lifetime Allowance limits how much you can save into a pension over your lifetime without suffering additional tax charges.

For the 2022/23 tax year, the Lifetime Allowance is £1,073,100. If you exceed this allowance, you may face an unexpected tax bill. This allowance covers the total value of your pension, so you need to consider how investment performance could affect the value as well as contributions and tax relief. 

Do you have questions about your pension contributions? Contact us

If you have any questions about your pension contributions, from whether you should boost your deposits before the end of the tax year to what your Annual Allowance is, please contact us.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. 

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.