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TPT Retirement Solutions
FAQs

What's the Annual Allowance?

CATEGORIES:

  • Members
  • Pension regulation

The Annual Allowance

Your Annual Allowance is a limit on the total amount of pension savings you can make each year without incurring a tax charge. It applies to all your pension schemes in total, not individually.

The Annual Allowance limits were updated as part of the 2023 Spring Budget and became effective on 6 April 2023 as follows:

  • The limit for the current tax year (2023/24) is £60,000. This includes all your contributions, tax relief and employer contributions across all the pension arrangements you have.
  • If your income is over £260,000 in a tax year, your Annual Allowance for that year will reduce on a tapered basis. For every £2 of adjusted income above £260,000, your Annual Allowance will reduce by £1. The maximum reduction is £30,000, meaning anyone with an income of £310,000 or above will have their Annual Allowance reduced to £10,000. 

The Money Purchase Annual Allowance

If you’ve cashed in a Defined Contribution (DC) pension, i.e. taken more than the 25% tax free lump sum or you are drawing down an income from a 'flexi-access drawdown fund', the limit for future DC contributions will be reduced to £10,000, which is known as the ‘Money Purchase Annual Allowance’ (MPAA) for any DC contributions you make. 

This applies if you want to continue making pension savings in a DC pension arrangement. 

If you also have defined benefits (DB) with your current employer, the MPAA reduces the Annual Allowance for your DB benefits to a maximum of £50,000. The MPAA only applies to contributions to DC pensions and not to DB schemes. 

Please consider taking independent financial or tax advice if this applies to you.

What if I exceed my Annual Allowance?

If you exceed the Annual Allowance in a tax year, you won't receive tax relief on any contributions that are above the limit, and you’ll have to pay an Annual Allowance charge.

You may be able to use any leftover Annual Allowance from the previous three tax years to reduce or cancel the Annual Allowance charge if you did not use your full Annual Allowance in those years. This does not apply if you have a Money Purchase Annual Allowance (MPAA).

The Annual Allowance charge will be added to the rest of your taxable income for the tax year in question and used to work out your tax liability. If the Annual Allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits. Your pension scheme benefits would be reduced accordingly to take account of the charge.