Tax on your private pension contributions

3. Annual allowance

You usually pay tax if savings in your pension pots go above the annual allowance. This is currently £40,000 a year.

Carrying over unused allowance from previous years

You can top up your allowance for the current tax year (6 April to 5 April) with any allowance you didn’t use from the previous 3 tax years.

The allowance was £50,000 for tax years between 6 April 2011 and 5 April 2014.

The tax year 6 April 2015 to 5 April 2016 was split into 2 periods with different tax-free allowances.

Period Annual allowance
6 April 2015 to 8 July 2015 (the ‘pre-alignment tax year’) £80,000
9 July 2015 to 5 April 2016 (the ‘post-alignment tax year’) £0

You can carry over up to £40,000 of unused allowance from the pre-alignment year to the post-alignment year. You can add this to any unused allowance from between 6 April 2014 and 5 April 2017.

For the tax year 6 April 2016 to 5 April 2017 the annual allowance was £40,000.

You can check if you have any unused allowances that you can carry forward.

Lower allowance if you take money from a pension pot

Sometimes it’s possible to keep paying in after you take money out of a pension pot - but you may have to pay tax on contributions over £4,000 a year.

That’s because your annual allowance drops to £4,000 for all defined contribution schemes you’re in. It drops in the first full tax year after you take money from your pension pot.

The lower allowance is sometimes called the ‘money purchase annual allowance’. You can’t top it up with unused allowance from previous years.

For the ‘pre-alignment tax year’ (6 April to 8 July 2015), this money purchase annual allowance is £20,000.

The ‘post-alignment tax year’ (9 July 2015 to 5 April 2016) doesn’t have its own money purchase annual allowance, but you can bring over up to £10,000 of the allowance from the pre-alignment year.

Kinds of withdrawal that make your annual allowance drop

Your annual allowance drops when you take any of the following from a defined contribution scheme:

It also drops to £4,000 in some other situations - your pension provider sends you a ‘flexible access statement’ to tell you when this happens.

If your allowance drops to £4,000 for one of your pension pots, you must tell other pension schemes you’re in within 13 weeks.

If you go over the lower allowance

Your annual allowance also drops to £36,000 for all defined benefit pension pots you’re in. You can usually top this up with unused allowance from the previous 3 tax years.

If you go over the pre-alignment tax year’s £20,000 allowance, that year’s annual allowance for defined benefit pensions changes to £60,000. You can carry over up to £30,000 of this, but the rules are complicated - speak to a tax or pensions professional to check.

The post-alignment year doesn’t have its own allowance for defined benefit pensions, but you can carry over allowance from the previous 3 tax years.

Reduced allowance for high incomes

From April 2016 you’ll have a reduced (‘tapered’) annual allowance if both the following apply:

  • your ‘threshold income’ is over £110,000 - this is your income excluding any pension contributions (unless they’re paid as a salary sacrifice by your employer)
  • your ‘adjusted income’ is over £150,000 - this is your income added to any pension contributions you or your employer make

Work out your reduced annual allowance.

Check how much annual allowance you’ve used

You need your pension statements to work out how much annual allowance you’ve used in a tax year - ask your pension provider for statements if you don’t get them automatically.

  1. Check statements for ‘pension input periods’ that ended during the tax year.

  2. Work out how much annual allowance you used in those pension input periods - what counts towards your allowance depends on the type of pension scheme you’re in.

Do this for all pension schemes you belong to - the total from all schemes is how much annual allowance you’ve used.

Pension input periods (the period over which you measure your pension savings) now run for a year, between 6 April and 5 April.

Type of pension scheme What counts towards the annual allowance
Defined contribution pension schemes - personal, stakeholder and most workplace schemes Total amount of contributions paid in by you or anyone else (including your employer and the government)
Defined benefit schemes - some workplace schemes Any increase in the amount your pension provider promises to give you when you retire
Hybrid pension schemes The higher amount out of total contributions and any increase in the amount your pension provider promises to give you when you retire

Pay tax if you go above the annual allowance

You’ll get a statement from your pension provider telling you if you go above the annual allowance.

If you’re in more than one pension scheme, ask each pension provider for statements so you can work out how much you’ve gone above the allowance.

Use this information to fill in a Self Assessment tax return. Fill in the ‘Pension savings tax charges’ section - you’ll need form SA101 if you’re using paper forms.

HM Revenue and Customs (HMRC) uses your Self Assessment tax return to work out how much Income Tax you pay.

You can still claim tax relief for pension contributions on your Self Assessment tax return if you’re above the annual allowance.

HMRC doesn’t tax anyone for going over their annual allowance in a tax year if they:

  • retired and took all their pension pots because of serious ill health
  • died

If the tax is more than £2,000

You can ask your pension provider to pay HMRC out of your pension pot if you’ve gone over your annual allowance and the tax is more than £2,000.

You must tell your pension provider before 31 July if you want them to pay the tax for the previous tax year. You’ll still need to fill in a Self Assessment tax return.

If you’re paying tax because you went over the lower allowance of £10,000, your provider can only pay it from your pot if you would have paid more than £2,000 tax based on the full annual allowance of £40,000 (plus unused allowance from the previous 3 tax years).

Rates

The amount you went above the annual allowance is added to your taxable income. You pay Income Tax on taxable income at the tax rate that applies to you.