Pension annual allowance

With pensions, there’s a limit to how much you can save each tax year (April 6th to April 5th the following year), which is the lower of two things:

1. How much you earn each year
2. £60,000

How much you earn each year is a reference to your ‘relevant UK earnings’. This is things like your employment or self-employment income, but not including things like rental income or dividends (companies paying you some of their profit as an owner).

For example, if you earned £40,000 per year from a salary, you’d be able to save up to £40,000 yourself, as a total into all of your pensions, such as a combination of your work pension, and a personal pension (like Beach). 

You don’t count any employer contributions as part of your own earnings limit, but they do count towards the £60,000 maximum total.

If you earned more than £60,000, say £120,000 per year, a total of £60,000 can go into your pension per tax year.

The allowance includes any basic rate tax relief (20%) you get from adding into a personal pension (the 25% bonus). It doesn’t include any money you’ll get back from the government if you pay 40% or 45% tax and claim tax relief (an extra 20% or 25% paid to you).

You can use previous years’ allowances

The pension allowance applies to each tax year, and if you want to save more than your limit this year, and if you haven’t used all of your allowance within the last 3 tax years, you can use the remaining allowance of those years within this current tax year. As long as you had any eligible UK pension open during those years.

So, using our example above, if you did earn £40,000 per year, and wanted to save £60,000 this current tax year into your pension, as long as you had £20,000 remaining as a total from the last 3 tax years, you’d be able to save £60,000 this current year.

This is called the ‘carry forward’ rule.

There’s different rules for earning under £3,600

If you earn £3,600 or less, or are unemployed, you can only add up to £3,600 in total. This is £2,880 added by you, and £720 added as a 25% bonus (tax relief).

There’s different rules for income over £260,000

If your total taxable income is over £260,000, which includes things like dividends (and includes how much your employer pays into your pension), and if your income minus any pension contributions made is over £200,000 (technically called your threshold income), there’s a special rule…

Your annual allowance reduces from £60,000, and reduces by £1 for every £2 you earn over £260,000, until you reach £360,000, where your annual allowance will be £10,000 (and remains as a minimum for higher earners). This is called the tapered annual allowance.

The important bit

This guide is in relation to defined contribution pensions, which the Beach pension pot is, and is a guide for common situations only and is not for every tax scenario or income. The rules are different if you have withdrawn cash from your pension. 

Tax treatment depends on your individual circumstances, and Beach does not provide tax advice. If you’re unsure about your own circumstances, it’s a great idea to speak to a qualified financial advisor.

You can find more detailed information about pension tax rules on the GOV.UK website.