Pension planning and tax advice

The annual allowance is the maximum amount you can pay into a pension and receive tax relief, or the maximum an employer can contribute without a tax charge arising on their employee. It currently stands at £60,000.

The pension annual allowance works on the following basis:

• You must have pensionable income at least equal to the contribution, although this is not necessarily the case with employer contributions
• You can potentially ‘carry forward’ unused allowances from the previous three years if you’re able to contribute more than the annual allowance
• If you carry forward unused allowances from previous tax years, you must have been a pension scheme member during those tax year(s) and there are other conditions which also need to be met.

If your pension contribution exceeds the annual allowance, the excess amount will usually be added to your other income and charged at your marginal rate of income tax. So, an additional rate taxpayer would face a tax charge of £45 for every £100 they contribute into their pension over the annual allowance.  

However, if you use up your annual allowance for the current year but didn’t use up your full annual allowance for the previous three years, ‘pension carry forward’ allows you to use this to contribute more into your pension tax-efficiently. Here’s how it works:

Step 1 – Use all your annual allowance for the 2023/24 tax year.

Step 2 – Once you've done so, you can use any unused allowance from three years ago – i.e. the 2020/2021 tax year.

Step 3 – Once you've used up your annual allowance for the 2023/24 and 2020/21 tax years, you can use any unused allowance from two years ago – i.e. the 2021/22 tax year.

Step 4 – Once you've used up your annual allowance for the 2023/24, 2020/21 and 2021/22 tax years, you can use any unused allowance from one year ago – the 2022/23 tax year. 

If you are a high earner and meet both the following criteria in the current tax year, you will be affected by the tapered annual allowance:

1. Your ‘threshold’ income exceeds £200,000
2. Your ‘adjusted income’ exceeds £260,000

In simple terms, a tapered annual allowance (TAA) means your allowance will go down by £1 for every £2 over and above £260,000. If your adjusted income is over £360,000 your allowance will go down to a minimum of £10,000.

Calculating your ‘adjusted’ income is not straightforward, as it is not limited to your pensionable earnings but can include dividends, rental income, interest, employer pension contributions and more. You also need to recalculate your ‘threshold’ and ‘adjusted’ income every year.

Your Wealth Planner will help you take stock of your income and work out what your maximum yearly pension contribution will be.

The pension lifetime allowance (LTA) was the maximum amount you can save into your pension tax-free.

In the Spring 2023 Budget the Chancellor announced that the tax charge applicable to the excess over the lifetime allowance would be set at 0% for the 2023/24 tax year, before the lifetime allowance itself is abolished from 6 April 2024. This effectively means there is no longer a lifetime limit, opening up new opportunities to save in a tax efficient way. However, entitlement to a tax-free lump sum is capped at £268,275 for many pension savers, rather than being 25% of the pension value. As such, part of the previous regime remains. However, there are situations where a higher entitlement may be available.

Your Wealth Planner will be able to advise you on your tax-free entitlement based on your personal circumstances.