FOR ADVISERS ONLY
Contributions, annual allowance and tax relief
These can be summarised in four short points:
- Contributions are unlimited.
- But there are restrictions on the amount of tax relief that will be given.
- And there are further restrictions which could potentially lead to a tax charge.
- Fortunately there are ways to try and avoid such a charge.
The basics
This analysis focuses on pension contributions, who can pay them and if there are any restrictions.
Contributions and tax relief
The tax relief on contributions is arguably the major selling point of pensions.
An employer can pay any amount of contribution for one of their staff but it's up to their local tax office to decide whether the whole contribution receives tax relief. A member can pay as much as they like into a pension but there's a limit on the amount of tax relief they will be given.
For higher earners, further tax relief may be given. In some scenarios, up to 60% tax relief is available.
- Member contributions and higher rate tax relief
- How to get 60% tax relief on pension contributions (exc Scotland)
- How to get 61.5% tax relief on pension contributions (Scotland)
The bands and rates of Scottish income tax differ from the rest of the UK.
You can use redundancy payments to pay a pension contribution, this article explains how this can be done.
Sadly, many people were made redundant in 2020. Often they might have long service, so a large amount of the redundancy payment could be taxable. For individuals over 55 or in their 50s, paying a pension contribution is very attractive as access is close and it's very tax efficient.
Anyone can become or remain a member of a UK pension scheme, regardless of nationality and UK tax treatment. However, tax relief on member contributions will only be available to those who are 'relevant UK individuals'.
In specie transactions can involve pension schemes in two different ways - in specie transfers and in specie contributions. This article explains the difference.
Annual allowance
The annual allowance is a limit on the amount of contributions that can be made without incurring a tax charge.
This article explains how pension tax relief for individuals with high incomes will be restricted by a tapered reduction in the amount of the annual allowance.
This article explains how scheme pays works and the conditions that apply.
These articles explain the transitional pension input period rules for DC and DB arrangements.
This article explains how pension input amounts operated since the 8 July 2015 budget announcements.
This article explains how pension input periods operated prior to the 8 July 2015 budget announcements. Since then pension input periods are aligned with tax years for all registered pension schemes.
This policy paper sets out Royal London’s thoughts on how advisers can set about giving sound advice to clients in this space. In addition to providing a brief reminder on how the annual and lifetime allowances work, we examine the options for paying the charges, set out suggested processes for working out whether an individual is better off financially by being in or out of their scheme and explain the other relevant considerations and regulatory issues.
Carry forward
There are potential ways that tax charges can be avoided, most notably by using 'carry forward'.
CPD
Case studies
- 3rd party contributions - Saving for future generations Pt I
- 3rd party contributions - Saving for future generations Pt II
- 60% tax relief on pension contributions (excluding Scotland)
- 61.5% tax relief on pension contributions (Scotland)
- Carry forward of unused annual allowance - Case studies (PDF 272 KB)
- Extracting company profits
- Overseas – continuing to pay contributions to a registered pension scheme after leaving the UK
- Taper trap
Other ways to avoid (or mitigate) tax charges
As well as carry forward, there are some other ways that tax charges can be avoided.
Frequently asked questions
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