Top up your savings now
The pension contribution allowance rose to £60,000 this tax year
Time is running short to make full use of your pension contribution allowance for the 2023-2024 tax year. This year’s limits are more generous than in previous years, but you only have until 5 April to take advantage. The annual allowance for pension contributions covers everything you pay into your pension plans over the course of the tax year, plus any contributions you receive from your employer and the value of basic-rate tax relief paid in by the government. For most people, this year’s cap is £60,000, or the value of their annual income if this figure is lower; that has increased from £40,000 in recent tax years.
In defined-contribution pension schemes, such as personal and stakeholder pensions, as well as most employer-run plans, assessing where you stand on the annual allowance is straightforward. You simply add up the value of all contributions into your pension since the first day of the 2023-2024 tax year on 6 April. If you’re a member of a definedbenefit pension scheme at work, things are more complicated – there’s a formula you need to use to assess how increases in the value of your benefits over the tax year count against the allowance.
Rules for high earners
The regulations work a little differently for non-earners and very high earners. In the first category, everyone is entitled to a £3,600 annual allowance, even if they have no income at all. One spouse could pay into the pension of the other, for example, claiming basic-rate tax relief to reduce the cost of a £3,600 contribution to £2,880. At the other extreme, the tapered annual allowance imposes extra limits on those with very high earnings. The key figure is your “adjusted income”: broadly, your total taxable income plus the value of any pension contributions you receive from your employer. If this figure is above £260,000, your annual allowance will be tapered downwards by £1 for every £2 that you’re above the cap. For example, if your adjusted income is £280,000, your annual allowance declines to only £50,000. The taper applies to adjusted incomes of up to £360,000, at which stage your yearly allowance is only £10,000. Incomes above that level still get this minimum allowance.
The only other wrinkle to watch out for is the moneypurchase annual allowance, which applies to savers once they begin withdrawing money from their pension schemes later in life. You are entitled to go on contributing to a private pension even after your withdrawals have begun (if you’re still working, for example), but you will usually be limited to £10,000 a year. Many people don’t have sufficient disposable income to get anywhere near their annual allowance. But if you do have the cash, contributions to a pension are one of the most tax-efficient savings options you have. And saving more may make you eligible for extra contributions from your employer. It therefore makes sense to look hard at how much you can afford, although always bear in mind that once money is in a pension scheme, you can’t get at it until your mid-fifties. If you have reached your annual allowance, the carry-forward rules might enable you to top up your contribution. These allow you to take advantage of unused annual allowance remaining from any of the past three tax years in the current tax year. For some people, this will extend their annual allowance by a considerable amount.
Finally, note that the lifetime allowance on pension savings has now been abolished. Until recently, many savers worried about paying too much into their pension plans, since tax charges applied on funds of more than around £1.07m when cashed in. However, this isn’t something you currently need to worry about – although official Labour Party policy is to reintroduce the lifetime allowance if it is elected to government.