Paying into a pension scheme is a tax-efficient way of saving for your future with the help of your employer, who will also contribute to your savings pot. A key benefit of saving through a pension is that your contributions may also receive tax relief.
How Tax Relief works
This means, if you’re a basic-rate tax-payer, for every £10 you pay it only costs you £8, as £2 is tax relief. Or if your income is taxed at the highest rate, for every £10 you pay it costs you £6.00 as £4.00 is tax relief.
As your contributions are taken from your gross pay (before any tax is deducted) by your employer it means you get the tax relief directly in your pay rather than having to go to HMRC separately.
If you do not pay income tax, you will be unable to benefit from this tax relief through your TPT Scheme.
Your TPT savings are invested. You don’t have to pay tax on the investments available through your TPT Scheme.
Annual Allowances explained
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What is the Annual Allowance?
The Annual Allowance (AA) is the limit on the amount of pension savings you can build up in a tax year without paying a tax charge. It applies to the total of your own and any employer contributions.
The AA limits were updated following the 2023 Spring Budget and the figures set out below apply to the 2023/24 tax year.
If your income is less than £260,000, the Annual Allowance is £60,000 for the 2023/24 tax year (6 April 2023 - 5 April 2024). That means you and your employer can pay up to a total of £60,000 into your retirement savings during the tax year without being charged tax on those payments.
If you earn over £260,000, you might be subject to the lower ‘tapered Annual Allowance’. In this case, the more you earn, the lower your Annual Allowance.
If your total earnings are £360,000 or more, you will have an Annual Allowance of £10,000, which will not reduce any further.
This limit applies across all pensions you’re paying into. So, if you’re paying into more than one, you’ll need to add up all your pension contributions to determine whether you’re paying more than the Annual Allowance that applies to you.
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What is the Money Purchase Annual Allowance?
The Money Purchase Annual Allowance (MPAA) is a reduced Annual Allowance of £10,000 that will apply to you if you:
- receive a payment from another defined contribution arrangement using flexible options, or
- receive a payment from a 'decreasing' lifetime annuity.
If this applies to you, the pension provider that pays you either of the above options should provide you with a statement informing you that the MPAA applies to you. It’s then your responsibility to tell us that the MPAA should be applied.
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What if I go over the Annual Allowance limit?
You may be subject to a tax charge. This is based on your marginal rate of income tax, and the charge is on the amount by which you’ve exceeded the £40,000 limit or your individual lower tapered Annual Allowance by.
You may be able to carry forward any unused allowance from the previous three tax years to the current tax year.
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