Understanding the annual allowance for pension schemes

You can save as much as you like towards your pension each year, but there's a limit on the amount that will get tax relief. The maximum amount of pension savings that can benefit from tax relief each year is called the annual allowance.

On this page:

Annual allowance limit

The amount of your pension savings that benefits from tax relief is limited to an annual allowance, currently £40,000.

  • a registered pension scheme
  • an overseas pension scheme - as long as either you or your employer qualify for UK tax relief on those pension savings

If you save more than this amount you may have to pay a tax charge on the excess.

If you're already taking a pension using 'flexible drawdown' the amount of your annual allowance will be reduced.

From 6 April 2011 until 5 April 2014 the annual allowance was £50,000.

Before 6 April 2011 the annual allowance was higher and different rules applied.

More information about flexible drawdown

Technical guidance - how the annual allowance worked before 6 April 2011

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Finding out if you have an annual allowance charge

The sections below explain how you work out your pension savings and pay any annual allowance tax charge due. There is also a tool you can use by following the link below to work out whether you may be affected by this charge.

Pension schemes annual allowance checking tool

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Working out your pension savings for a tax year - pension input periods

The value of all pension savings is measured over a period of time called the pension input period. This period usually covers 12 months but doesn't have to match the tax year. This doesn't apply to overseas pension schemes because their pension input periods must run from 6 April one year to 5 April the following year.

If you're saving into more than one scheme or even into more than one pension pot in the same scheme you may have several different pension input periods.

Your pension savings for a tax year are all the pension savings made in pension input periods that end in the same tax year.

Example

You have pension savings in two different pension pots that have different pension input periods:

  • pot A - 1 May 2013 to 30 April 2014
  • pot B - 1 January 2014 to 31 December 2014

Your pension savings for the 2014 to 2015 tax year are the total of your pension savings in both pots because the end date for both of them is in that tax year.

The annual allowance went down from £50,000 to £40,000 from 6 April 2014.

It is pension savings with pension input periods ending in the 2014 to 2015 tax year that are tested against the £40,000 annual allowance.

Because pension input periods don't have to match tax years (except for overseas pension schemes), in many cases the pension input period will start in an earlier tax year than when it ends. This means that any pension savings for pension input periods starting before 6 April 2014 (which could be as early as 7 April 2013) but ending in the 2014 to 2015 tax year will count towards the new lower annual allowance limit of £40,000.

Split pension input period

If you have any pension input periods that started before 14 October 2010 and ended in the 2011 to 2012 tax year they’ll be split if all of your pension savings made in all of your pension input periods that end in the 2011 to 2012 tax year exceeds £50,000.

Your pension scheme administrator can tell you what your pension input periods are.

More guidance on split pension input periods (PDF )

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Paying the annual allowance charge

You can carry forward any unused annual allowance from the last three tax years to the current tax year so you might not have to pay the annual allowance charge.

If your pension savings are more than the total of the annual allowance and your unused allowance you'll pay a tax charge on the excess.

You're responsible for paying the annual allowance charge. In certain circumstances you can ask your scheme administrator to pay the tax for you out of your pension pot.

Depending on what type of pension scheme you're in, working out how much annual allowance you've used or can carry forward and how much tax you have to pay can be complicated. Follow the link below to find out more.

The tax rate that's charged depends on any other taxable income you have. The amount of your pension savings that exceeds your annual allowance is added to any other taxable income for that tax year. After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands. Follow the link 'Income Tax - the basics' to find out what the taxable bands are.

Calculating and paying the annual allowance charge

Income Tax - the basics

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When you don't have to pay an annual allowance charge

You won't have to pay an annual allowance tax charge due in a tax year if you:

  • retire and start getting a pension or lump sum from all your pension pots due to severe ill-health
  • die

You also won't have any pension savings to count towards the annual allowance if for the whole pension input period you weren't building up new pension savings and any increase to your savings isn't more than a maximum amount.

Technical guidance - more on when the annual allowance charge doesn't apply

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Finding out how much your pension savings are

The value of your pension savings can be more complicated than the amount you've paid into your pension schemes. For example, some people don't make any payments into their scheme as their employers make the payments (more in the sections below). The amount of your pension savings depends on the type of pension scheme arrangement that you belong to.

Your scheme administrator must tell you if your pension savings in their scheme are more than the annual allowance. If you don't get a pension savings statement you can still ask them to give you the information.

If you can't get details from your scheme administrator, you'll need to estimate the amount of your pension savings. You can also use the online calculator - for some but not all types of pension schemes - by following the link below.

Pension savings in a money purchase arrangement

Your pension savings are the total amount of your contributions and any contributions paid by someone else, for example your employer.

Pension savings in a defined benefits or cash balance arrangement

This is broadly the increase in the value over the pension input period of your:

  • promised pension for a defined benefits arrangement
  • promised pension pot for a cash balance arrangement

You'll need to find out the value of your pension savings at the start and end of the pension input period. The difference between the two values is the amount of your pension savings for the arrangement. If the value of your promised pension has gone down over the period you won't have any pension savings for that period.

Pension savings in a hybrid arrangement

With a hybrid arrangement you need to identify the possible types of benefit and their amount of pension savings. The value of your pension saving for a hybrid arrangement is the greatest of the possible amounts.

Pension savings in an overseas scheme

These are valued in the same way as they would be for a registered pension scheme but with an adjustment to reflect how much of your employment income is taxable in the UK.

Pension savings annual allowance calculator

Find out what type of pension arrangement you belong to

Annual and lifetime allowance statements

More on how to calculate the amount of your pension saving

How to value your pension saving in an overseas pension scheme

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More useful links

Technical guidance - how the annual allowance works

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