Generally, the maximum you can contribute to a pension scheme in any one tax year is £60,000 but not more than your annual earnings.
If you have no earnings you can contribute up to a maximum of £2,880, to which the government will add tax relief making a total contribution of £3,600.
You may be able to contribute more than £60,000 if you have had a pension fund in the three previous years but did not contribute the full available allowance for that year. This is called using ‘carry forward’.
If making a personal contribution you cannot contribute more than your annual earnings in the current year when using carry forward, however if the contribution is being made by your employer or limited company the £60,000 limit can be ignored if the pension contribution is considered to be wholly and exclusively for the employer’s trade or profession by HMRC which you would need to check with your accountant.
You can start to take your pension from age 55…, however, the last few years are often considered to be the best period for growth as this is when the pension has the biggest value and you would therefore expect the growth to be most significant. Therefore, taking your pension early will usually significantly reduce the amount of income available to you later.
The Minimum Pension age is to increase from age 55 to age 57 from 2028 when the state pension age will be 67. The minimum pension age will then track the state pension age rises, at 10 years before the relevant pension age.
When you work you are allowed to earn £12,570 (2022/23) before you pay any income tax, after which you start to pay income tax at 20% until your earnings reach £50,270 (2022/23) thereafter you pay income tax at 40% until your earnings reach £150,000 (2022/23) at which point you start to pay 45% income tax.
The first 25% of your pension fund value can be taken tax free either as a lump sum or as income. Any amount over this will be taxed as if it were income in the same way as you paid tax when you were working.
1/ The MPAA – Money Purchase Annual Allowance
Under normal circumstances you are allowed to contribute £40,000 to a personal pension per year and receive tax relief. However once you take any taxable income from your pension fund ie any amount over the available tax free cash amount, the maximum you can pay into your personal pension in any tax year thereafter, without being liable to a tax charge, is reduced to £4,000.
If you also pay into a defined benefit pension scheme and you do pay £4,000 into a personal pension scheme, your contribution allowance for the defined benefit scheme is unchanged and simply reduces to £36,000 a year.
2/ Tapered Annual Allowance for high earners
The £40,000 annual allowance is reduced by £1 for every £2 of ‘adjusted income’** earned over £240,000, up to a maximum reduction of £36,000 leaving a minimum Tapered Annual Allowance of £4,000.
– Members with a ‘threshold income’* of less than £200,000 will be exempt from the Tapered Annual Allowance.
– Members with an adjusted income of between £240,000 and £300,000 will be affected by the Tapered Annual Allowance.
– Those with an adjusted income of over £300,000 will have a Tapered Annual Allowance of £4,000.
*Threshold income includes all chargeable income
**Adjusted income includes all chargeable income plus Pension Contributions
Carry Forward under taper allowance. Unused allowances from the previous three tax years can still be carried forward as previously ie if a £20,000 tapered allowance is applied and a £10,000 pension contribution is made, then £10,000 can be carried forward to future years.
The money in your pension fund would be paid, outside of your estate, to your beneficiaries, tax free if you die before age 75 and at your beneficiaries marginal tax rate if you die after age 75.
If you want a review of your Pension(s) or would like to understand more about how pensions work; get in touch with our advisers to arrange an initial consultation.