Updated: January 14, 2020

Personal Pension Allowance

How much are you allowed to save into your pension each year? Find out everything you need to know in this in-depth guide.

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: January 14, 2020

If you’re looking to set up a personal pension, it’s important to have a clear understanding of the allowances available so you know exactly how much you can pay in and what you’re permitted to do with your funds once you decide to retire.

In this article, we take a look at the various personal pension allowances put in place by the UK government.

What is the personal pension annual allowance?

The annual allowance is the most you’re allowed to pay into a personal pension during a tax year and still qualify for tax relief. For the current tax year (2019/20) the maximum gross contribution allowed is £40,000 or 100% of your earnings (whichever is the lowest figure).

The annual allowance takes account of all payments made towards your personal pension. This includes contributions from:

  • Yourself
  • An employer
  • A third party (family member, for example)

You can still continue to make payments into your personal pension over and above the annual allowance. However, any excess contributions do not qualify for additional tax-relief from the government and will be subject to income tax at your marginal rate.

The table below illustrates how the annual allowance can be applied in practise, based on a variety of income examples and pension contributions.

Total income during tax year (2019/20) Annual personal pension allowance Pension payments made during the year Contributions qualifying for tax-relief Contributions not qualifying for tax-relief
£20,000 £20,000 £5,000 £5,000 £0
£40,000 £40,000 £15,000 £15,000 £0
£60,000 £40,000 £40,000 £40,000 £0
£80,000 £40,000 £50,000 £40,000 £10,000

What is the tapered annual allowance and how does it work?

The tapered annual allowance was introduced at the start of the 2016/17 tax year and, effectively, reduces the overall personal pension contributions allowed for anyone earning over a particular amount of income.

There are two income measures used to assess whether tapering needs to be applied:

  • Threshold income: £110,000 (annual gross income excluding any pension contributions)
  • Adjusted income: £150,000 (annual gross income including all pension contributions)

Both income measures must be exceeded before tapering is applied, therefore, if your threshold income is above £200,000 but your adjusted income is not higher than £240,000 then your annual allowance will not be tapered.

Once your adjusted income rises above £150,000 the personal pension allowance reduces by £1 for every £2 over this threshold. So, for example, if your adjusted annual income is £170,000 your maximum allowance will be reduced by £10,000 to £30,000.

This reduction continues for adjusted income up to a maximum of £210,000. After this point, the annual allowance will reduce to £4,000 and remains at that level for any income above this amount.

Can I carry forward any unused annual allowance from previous tax years?

Yes, this is possible. You are allowed to carry forward any annual pension allowance not fully utilised from the previous three tax years.

To use the carry-forward facility you must have earned an amount of income at least equal to your total pension contribution and have been a member of a registered UK pension scheme during the tax years where you’re looking to make use of any unused allowance.

If you’d like to find out more about how you can maximise the personal pension allowance or concerned about whether you may already be close to the limit and, perhaps, want to look at ways you can make use of the carry-forward facility – this is where we can help.

If you give us a call on 0808 189 0463 or get in touch, we can arrange for an advisor we work with to contact you and discuss your own personal circumstances in more detail.

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What is the money purchase annual allowance (MPAA)?

The money purchase annual allowance (MPAA) applies specifically for anyone who is already drawing pension benefits but is below the age of 75 and still wishes to contribute towards a personal pension.

In these circumstances, the annual personal pension allowance reduces quite significantly to a maximum of £4,000 gross contributions.

So, for example, if you’ve taken early retirement but still earning an income alongside any pension you may now be drawing upon, you may still want to make regular pension contributions for later in life.

Due to the steep reduction in the annual allowance, it’s worth giving serious consideration as to whether you should draw a pension rather than rely on other sources of income.

If you’d like to speak with an expert about the options available to you, make an enquiry and we can arrange for an advisor we work with to get in touch.

What is the personal pension tax-free allowance?

When you decide to retire and ready to take the benefits from your personal pension you are allowed to take a 25% tax-free lump sum straight away, whilst the remaining funds can be used to produce a regular income.

So, for example, if you have a personal pension fund worth £160,000 you can take £40,000 immediately tax-free.

For the remaining £120,000 there are, essentially, two main options available to you:

If you’re approaching retirement and would like to know more about the options available to you, give us a call on 0808 189 0463 or get in touch and we will arrange for an advisor we work with to contact you.

Can I use my pension to offset any potential reduction in my personal income tax allowance if I’m earning over 100k?

Yes, this is certainly something you can consider. Since the 2010/11 tax year, your personal income tax allowance will be reduced by £1 for every £2 you earn over £100,000.

Once your income reaches in excess of £125,000 your personal allowance will have reduced to zero which means, in effect, your earnings between these two amounts will incur a marginal rate of 60% income tax.

Because pension contributions can be used to offset your overall adjusted annual income, this is an effective method of avoiding such reductions and increases in your overall tax liability.

If you’d like to know more about how your pension contributions can be used to offset your overall tax liability, get in touch and will arrange for an expert to contact you.

Speak to a pensions expert today

If you’re paying into a personal pension, it’s quite important to have a firm understanding of all the allowances available to you so you can maximise the contributions you wish to make before you retire.

If you’d like to discuss your own retirement plan with a pensions expert we can arrange for an advisor we work with to get in touch.

We won’t charge a fee for introducing you to the right advisor and any information is always given in the strictest confidence. Call us on 0808 189 0463 or make an enquiry to get started.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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