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    Pension Annual Allowance Advice

    No matter how you’re contributing to your pensions, make sure you’re saving for retirement in a tax-efficient way.

    Make the most of your savings. Whether you’re getting ready for retirement or already retired, using your allowances in a tax-efficient way can help you boost your pension savings.

     

    Pension Annual Allowance Advice

    No matter how you’re contributing to your pensions, make sure you’re saving for retirement in a tax-efficient way.

    Make the most of your savings. Whether you’re getting ready for retirement or already retired, using your allowances in a tax-efficient way can help you boost your pension savings.

     

    What is pension Annual Allowance?

    There’s no limit on how much you can save into your pension each year – but there is a limit on how much you can contribute while benefitting from tax relief. At present (remember, these rules could always be altered in future tax years) the Annual Allowance limit is currently £60,000 (tax year 2025/6) and applies to all your private pensions.

    The Annual Allowance increased from £40,000 in April 2023, “to help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns.” While this change applies to all pension savers, higher earners will benefit most from these changes.

     

    What contributions count towards annual allowance?

    If you exceed the Annual Allowance, a tax charge is made which essentially removes any tax relief that was given at source. The Annual Allowance applies to all your private pensions. Your personal pension plans, workplace pension, and any contributions made by you or on your behalf (including employer contributions) count towards this limit.

    Annual allowance for high earners

    • How does the Tapered Annual Allowance work?

      How does the Tapered Annual Allowance work?

      Higher rate taxpayers with an ‘adjusted income’ over £260,000 a year (your combined earnings, taxable income and pension contributions made by your employer) have additional complexity in their retirement planning. The Tapered Annual Allowance reduces their Annual Allowance by £1 for every £2 of ‘adjusted income’ earned above £260,000.

    • An example of the Tapered Annual Allowance

      An example of the Tapered Annual Allowance

      Let’s look at an example. Maya earns £285,000 and has contributes £20,000 of this through Salary Exchange to her Group Pension Plan (a total contribution of £40,000 as  £20,000 contribution from Maya and £20,000 from her employer). Her annual allowance is tapered to £37,500, so Maya faces an annual allowance tax charge on £2,500 unless she has unused annual allowance to carry forward from previous years.

    • Do your earnings change significantly from year to year?

      Do your earnings change significantly from year to year?

      If your earnings change significantly from year to year, for example if you’re self-employed, it’s particularly important to make sure you’re not caught out by the Tapered Annual Allowance. Your Financial Adviser can help you calculate your threshold and adjusted incomes if you are unsure how to do this, and help you manage an unexpected charge on your tax bill.

    Try our pension calculator

    Are you retirement ready?

    Our pension calculator uses your current age and pension savings to give you an idea of what your retirement income could look like. With an understanding of the Annual Allowance, you can consider whether your current plans are appropriate for your ideal retirement.

    Try our pension calculator Explore pension tax advice

    What happens if you exceed your annual allowance

    If you exceed the annual allowance you won’t receive tax relief on the excess contributions. You will also see an addition to your tax bill that year. The ‘annual allowance charge’. Don’t get caught out. Talk to your financial adviser about your income expectations – especially if you’ve seen changes to your income and workplace benefits.

    If you haven’t started to withdraw taxable funds from your pensions, you may be able to use Carry Forward rules. We’ll discuss these in more detail below.

     

    Pension carry forward

    The current Annual Allowance rule allows most people can save up to 100% of their income in a pension up to an annual limit of £60,000. The ‘carry forward’ rule then allows pension savers to build up their pension with any unused allowances from the previous three tax years. This allows pension savers to save an additional £160,000 in your pension.

    Again, this rule can be particularly beneficial for anyone who is self-employed, with income that changes significantly from year to year.

     

    Accessing your pension

    The Money Purchase Annual Allowance limits your Annual Allowance (the amount you can contribute to your pension) after you have begun to withdraw taxable income from a money purchase (Defined Contribution pension) arrangement. This is now £10,000 (tax year 2025/26).

    Not sure why you would want to continue to add to your pension when you’re retired? Our article explains the benefits of continuing pension contributions and goes into more detail about how to trigger the this.

     

    Get pension annual allowance advice from Wren Sterling

    Pension rules are complex, which is why it can help to talk to a financial adviser who can do the leg work for you. Take control of your retirement planning. Set up an appointment to discuss your options.

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    FAQ

    • Does accessing your pension reduce the annual allowance?

      Does accessing your pension reduce the annual allowance?

      When you begin taking taxable income from your Defined Contribution pension, this will trigger the Money Purchase Annual Allowance.

    • How can I calculate my annual allowance?

      How can I calculate my annual allowance?

      Most people have a £60,000 allowance, but this can be lower if your income is high or if you have taken taxable pension benefits before. You may also be able to carry forward unused allowance from the past three tax years. HMRC provides an online calculator to guide you, and your adviser can help you check the figures.

    • How can I avoid exceeding my annual allowance?

      How can I avoid exceeding my annual allowance?

      Keep records of your income and pension savings. Consider if you are likely to exceed your allowance, and if you are worried about triggering it, or the Tapered Annual Allowance, get in touch with your financial advisor.

    • What is Tapered Annual Allowance?

      What is Tapered Annual Allowance?

      Higher rate taxpayers with an ‘adjusted income’ over £260,000 a year (your combined earnings, taxable income and pension contributions made by your employer) have additional complexity in their retirement planning. The Tapered Annual Allowance reduces their Annual Allowance by £1 for every £2 of ‘adjusted income’ earned above £260,000.

    • What is Money Purchase annual allowance?

      What is Money Purchase annual allowance?

      The Money Purchase Annual Allowance is a limit designed to prevent people from recycling income and repeatedly benefiting from tax-relief on their pensions and benefitting from additional tax-free cash – rather than benefitting pension savers. This limits your annual allowance to £10,000.

    • Can I contribute more than I earn?

      Can I contribute more than I earn?

      Current Annual Allowance rules allow most people can save up to 100% of their income in a pension up to an annual limit of £60,000. You may be able to contribute more than your yearly income using the carry forward rule.

    • What is the carry forward rule?

      What is the carry forward rule?

      The ‘carry forward’ rule also allows pension savers to build up their pension with any unused allowances from the previous three tax years. This would allow you to contribute up to £160,000 in a single tax year (less any other pension contributions in the previous two years.)

    A pension is a long-term investment not normally accessible until age 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.

    This article for information only and does not constitute advice. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

    The Financial Conduct Authority does not regulate tax advice.