Save £120k with tax-year end tips for your pension

The start of a new tax year means pension allowances are refreshed. Here’s how you can make the most of your yearly limits. The maximum amount of contributions that can be paid into a pension each year that benefit from tax relief is £40,000. Tax relief is given by the Government to encourage you to save into your pension and savers can make personal contributions up to 100pc of their earnings, including tax relief.

Annual contributions are capped at £40,000, including employer and third-party contributions. It is possible to pay in more than this, but a tax charge would be payable on the excess unless you use “carry forward” provisions. The allowance applies to all the pensions schemes you save into each tax year, so is not a per scheme limit.

Tapering makes it more complicated for high earners, who can have a reduced annual allowance tapered down to £4,000. Savers are only affected if their “adjusted income”, including employer contributions, is more than £312,000. But if “threshold income” is no more than £200,000 the taper does not apply. If your earnings drop below the thresholds, the standard annual allowance is restored.

The money purchase allowance means accessing your defined contribution pension reduces your annual allowance down to £4,000. Once triggered, there is no going back, and the £4,000 annual limit will apply in all future years to your pension savings, so can be extremely detrimental to your retirement plans.

It is possible to pay higher pension contributions in a tax year than the annual allowance, without incurring a tax charge, by “carrying forward”. This is a useful option for those receiving a large salary increase, being made redundant or close to retirement.

This little-known tax rule allows savers to carry forward unused allowances from three previous tax years, meaning £120,000 can potentially be saved. However, triggering the MPAA prevents savers using this loophole for defined contribution pensions.