Individuals can contribute to any number of pension plans.
Personal contributions made by an individual are unlimited. However, there is a limit on the amount of gross contributions an individual can pay each year and benefit fully from tax relief.
Tax relief on individual contributions is restricted to the higher of £3,600 or 100% of relevant UK earnings.
Tax relief is only given in the tax year the contribution is paid.
Investment income and dividends don't count as relevant UK earnings.
Income from pension products don't count as relevant UK earnings.
Total pension contributions are also subject to the annual allowance. This is different to pension tax relief.
The annual allowance is the total amount of contributions that can be paid into all pensions for an individual before a tax charge applies. This allowance applies to all individual contributions, employer contributions and contributions for the individual paid by a third party, for example a grandparent. The annual allowance is currently £40,000.
If the money purchase annual allowance has been triggered, an annual allowance charge will apply if pension contributions exceed £4,000 in a year.
If the tapered annual allowance has been triggered for an individual their annual allowance will be reduced, potentially as low as £4,000.
It may be possible to pay more than the annual allowance in a tax year without an annual allowance charge becoming due by carrying forward unused annual allowance from previous years. It's not possible to carry forward unused annual allowance against the money purchase annual allowance. It is however possible to carry forward unused annual allowance against the full annual allowance if it still applies to a defined benefit plan. For more information see An explanation of the money purchase annual allowance.
There are three main methods for giving tax relief; relief at source, net pay arrangement and relief on making a claim.
Our article Member contributions - tax relief and annual allowance provides more in depth analysis.
Special rules apply for those who are not resident in the UK. Further details can be found in Contributions to registered schemes for overseas individuals.
Employer contributions are not restricted by the employee's relevant UK earnings, however they must satisfy the 'wholly and exclusively' requirement to receive tax relief.
Employer contributions are paid gross and corporation tax relief is granted via the company accounts.
Tax relief is normally only given in the accounting period the contribution is made but if the contribution is over a certain amount it may be spread over more than one year.
Carry forward of unused annual allowance can also be used to cover employer contributions over the annual allowance.
Employer contributions over the annual allowance may also be subject to the annual allowance charge or money purchase annual allowance charge, payable by the individual. Carry forward can also be used here to avoid the annual allowance charge but not the money purchase annual allowance.
There are a number of other issues such as contributions for controlling directors, connected employee's, ex and non-employees.
The payment of contributions is not limited to the individual or employer; other people can also make contributions on the individual's behalf.
These contributions are treated as if they are paid by the individual with the limits that apply to individual contributions. So, tax relief is restricted to the higher of £3,600 or 100% of relevant UK earnings. The annual allowance, money purchase annual allowance or tapered annual allowance also applies.
If the contributions are for (grand)children tax relief will be restricted to £3,600 gross per year unless they have relevant UK earnings.
The annual allowance applies to the total of all pension contributions paid into registered pension schemes for an individual. How the contributions are valued for annual allowance purposes is explained in our annual allowance article.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.