RPSM06200010 - Member Pages: Annual Allowance: What is the annual allowance?

The annual allowance

This guidance explains the annual allowance rules up to 5 April 2011. If you want to know how the annual allowance works after that date see the guidance at http://www.hmrc.gov.uk/pensionschemes/annual-allowance/index.htm.

There is no limit on the contributions that can be paid to a pension scheme but there is a limit in the tax year on the amount of tax privilege that is available on the amount paid or rights accrued for a tax year in a registered pension scheme and this is known as the annual allowance. This allowance will either relate to all contributions paid by you or on your behalf and will include any contributions paid by your employer, or to accrued rights arising within a tax year.

The annual allowance for the tax year 2006-2007 will be £215,000 rising to £255,000 by 2010 (see page RPSM06100030) so the vast majority of people are unlikely to exceed the annual allowance.

Where the annual allowance is exceeded you will be liable to an annual allowance charge of 40% of the excess.

Where the pension arrangement is in the form of a money purchase benefit, the input for the test against the annual allowance for the tax year is measured by the amount of contributions.

Where the pension arrangement is a defined benefits or cash balance arrangement, the input is measured by the increase for the year in the amount of accrued rights to benefits.