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.
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The amount of your pension savings that benefits from tax relief is limited to an annual allowance, currently £40,000.
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.
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.
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.
You have pension savings in two different pension pots that have different pension input periods:
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.
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.
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.
You won't have to pay an annual allowance tax charge due in a tax year if you:
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.
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.
Your pension savings are the total amount of your contributions and any contributions paid by someone else, for example your employer.
This is broadly the increase in the value over the pension input period of your:
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.
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.
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.