Contributions, annual allowance and tax relief - frequently asked questions

The annual allowance limits the amount of tax relievable pension savings that can be made by or on behalf of an individual each year. Since the 2015/16 tax year, pension input periods have been aligned with tax years. Under a money-purchase scheme this is simply the value of the contributions paid in a pension input period. However, under a defined benefit or cash balance scheme it is the increase in the value of an individual's rights over the scheme's pension input period.

Rates & Factors: Annual allowance & money purchase annual allowance

The annual allowance applies in total to all pension increases an individual may have.

See below for details how these increases are valued when testing against the annual allowance. 

Money purchase benefits

The total contributions paid in any pension input period. This includes all individual, employer and third-party contributions.

• HMRC Pensions Tax Manual - PTM053200: pension input amounts: money purchase arrangements
• HMRC Pensions tax Manual - PTM058060: transitional rules for tax year 2015-16

Cash balance plans

The increase in the value of the individual's rights over the pension input period.

When working out how much the benefits have increased by, increase the value of the plan at the beginning of the pension input period by the increase in CPI over the 12 month period to the September before the start of the tax year in which the annual allowance is being calculated. This is then compared with the value at the end of the period.

The rights to be valued will include partial benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers into the scheme and any pension credits can be excluded.

• HMRC Pensions Tax Manual - PTM053400: pension input amounts: cash balance arrangements
• HMRC Pensions Tax Manual - PTM058070: Transitional rules for tax year 2015/16

Defined benefits schemes

The increase in value of the individual's rights during the pension input period.

When working out how much the benefits have increased by, calculate the annual pension amount at the beginning of the pension input period (this is the pension the individual would get if they retired now at normal pension age). Multiply this amount by 16. The total should then be increased by the increase in CPI over the 12-month period to the September before the start of the tax year in which the annual allowance is being calculated.  If the scheme also gives the individual a lump sum in addition to the pension (so not by commutation of pension), add this on. 

Then calculate the value at the end of the pension input period; the end value shouldn't be increased by CPI. Multiply this amount by 16. Again, if the scheme also gives the individual a lump sum in addition to the pension (so not by commutation of pension), add this on.

Deduct the start value from the end value you have calculated above, this is the pension input amount.

The rights to be valued will include any benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers into the scheme and any pension credits can be excluded. You can find an example in our article Pension input periods and pension input amounts.

• HMRC Pensions Tax Manual - PTM053320 pension input amounts: defined benefits arrangements: worked examples
• HMRC Pensions Tax Manual - PTM058070: Transitional rules for tax year 2015/16

Annual allowance

The annual allowance for pension input periods ending in the current tax year is £60,000.

If the amount paid in the pension input period exceeds the annual allowance for that year an annual allowance charge must be paid, unless there is unused annual allowance to carry forward from previous pension input periods. Since the 2015/16 tax year, pension input periods have been aligned with tax years. 

Money purchase annual allowance

If an individual flexibly accesses their pension benefits, the money purchase annual allowance is triggered. This means that the individual can only pay £10,000 to all money-purchase plans in any pension input period before the annual allowance tax charge is applied. If this occurs part-way through a pension input period only the contributions made after the trigger are tested against the money purchase annual allowance. However, the total contributions/accrual in that tax year are also tested against the £60,000 annual allowance.

For more information see our article Annual allowance.

Tapered annual allowance

From 6 April 2023 - Individuals who have adjusted income for a tax year of greater than £260,000 will have their annual allowance for that tax year restricted. It will be reduced, so that for every £2 of income they have over £260,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.

The maximum reduction is £50,000, so anyone with income of £360,000 or more will have an annual allowance of £10,000. Individuals with high income caught by the restriction may have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.

Previous rates

6 April 2020 and 5 April 2023 - Between these dates individuals who had taxable income over £240,000 had their annual allowance restricted. It was reduced, so that for every £2 of income they had over £240,000, their annual allowance is reduced by £1. The maximum reduction was £36,000, so anyone with an income of £312,000 or more has an annual allowance of £4,000.

6 April 2016 and 5 April 2020 - Between these dates individuals who had taxable income over £150,000 had their annual allowance restricted. It was reduced, so that for every £2 of income they had over £150,000, their annual allowance was reduced by £1. The maximum reduction was £30,000, so anyone with income of £210,000 or more had an annual allowance of £10,000.

For more information see our article tapering of annual allowance.

Yes. Individuals can carry forward unused annual allowance from pension input periods ending in the previous three tax years to the current pension input period. The annual allowance for pension input periods ending in the current tax year is £60,000.  Since the 2015/16 tax year, pension input periods have been aligned with tax years. 

It's still possible to carry forward unused annual allowance from previous years to a year where the taper applies. However, the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount. For more information see our article tapering of annual allowance.

It's not possible to carry forward unused annual allowance to a money purchase plan subject to the money purchase annual allowance. Money purchase contributions must be limited to £10,000 to avoid an annual allowance tax charge.

Where an individual dies, or takes benefits on a severe or serious ill-health basis, no pension input amount will arise for the pension input period ending within that tax year.

HMRC Pensions Tax Manual - PTM051200: When the annual allowance charge does not apply

The maximum gross amount is £3,600 a year.

HMRC Pensions Tax Manual - PTM044100: Contributions: tax relief for members: Annual limits

Yes. Somebody, other than the employer or former employer, may contribute to a scheme on behalf of an individual. It's treated as if made by the individual. So, for tax relief to be given, it can be no more than the higher of £3,600 and 100% of the individual’s relevant UK earnings.

In theory, an employer can pay any amount of pension contribution to a registered pension scheme in respect of one of their employees or an ex-employee, regardless of their salary.

Employer contributions qualify for full corporate tax relief, assuming they meet the 'wholly and exclusively' requirements.

HMRC Pensions Tax Manual - PTM043000: Contributions: tax relief for employers

Employer contributions usually benefit from full corporate tax relief in the accounting period in which they are paid. However, if the employer pays a pension contribution that's more than £500,000 of what's been paid in previous years, they may have tax relief spread over a period of years.

HMRC Pensions Tax Manual - PTM043400: Contributions: tax relief for employers: spreading

They're paid gross.

The individual will be subject to a tax charge (annual allowance charge or money purchase annual allowance charge, if it applies) on the amount of any contribution (both individual and employer) paid in excess of the annual allowance, tapered annual allowance or money purchase annual allowance each year.

No. She can't carry forward unused tax relief from a previous tax year. What can be carried forward is any unused annual allowance from a previous pension input period. If the amount of contributions paid is more than the annual allowance available in the pension input period, she can carry forward any unused annual allowance from previous pension input periods to increase that year's annual allowance. Katie can go back as far as pension input periods ending three tax years ago.

See our article on Carry forward for further details.

If Katie has triggered the money purchase annual allowance, she can only use carry forward to allow her to pay more into a defined benefit plan.

If Katie is subject to the tapered annual allowance, it's still possible to carry forward unused annual allowance from previous years to a year where the taper applies. However, the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount.

The annual allowance acts like a cap on the amount of tax relief an individual can receive. The tax relief is capped by imposing an annual allowance charge on any contribution over the annual allowance available for the pension input period. The charge is calculated using the individual's marginal rate of income tax, so it's designed to effectively remove the tax relief received on the contribution. This is done via Katie's tax return.

See our article on tax relief and the annual allowance for further details.

No. For defined benefit schemes the employer contribution isn't assessed for each individual as it's an amount paid to the scheme, not each individual's 'pot'. So contributions (including Lynn's) can't be used as the measure.

The pension input amount for defined benefit schemes is the value of benefits accrued over the pension input period. An example of the calculation can be found in our article - Pension input periods and pension input amounts.

A partnership can pay employer contributions for those who are employees (for example administration staff). They can deduct those contributions from the partnership's taxable profits.

The partners themselves aren't employees; they're self-employed. Any contributions are therefore personal rather than employer contributions.

No, it doesn't. Pension income is treated in the same way as investment income; it doesn't count as earnings. Only earnings such as salary, wages bonus, overtime, commission or self-employed earnings count.

See the ‘Earnings that attract tax relief’ section of this page of the HMRC's Pensions Tax Manual.