The money you pay into your pension arrangements usually gets tax relief. However, there are limits on how much you can save towards your pension before tax will be charged on any excess.
Annual Allowance = £60,000
The Annual Allowance is the total amount you can pay into all of your pension arrangements each tax year before tax will be charged. Each £1 of annual defined benefit pension built up is treated as £16 for this purpose.
You’ll get a statement from your pension provider telling you if you go above the Annual Allowance in that particular arrangement. You can carry forward any unused Annual Allowance for up to three years.
Money Purchase Annual Allowance = £10,000
This is the total amount you can pay into any defined contribution pension arrangements each tax year before tax will be charged. The Money Purchase Annual Allowance only comes into effect if you have already taken some of your defined contribution savings as cash or a short-term annuity from a flexi-access drawdown fund, cash from a pension pot (‘uncrystallised funds pension lump sums’) or if you have taken more than the limit from a capped drawdown fund.
Tapered Annual Allowance = between £10,000 and £60,000
Your Annual Allowance will only be tapered if you are a high earner and your ‘adjusted income’ (your taxable income plus your Pension Input Amount) is £260,000 or more and your taxable income is over £200,000. For every £2 of adjusted income over £260,000, your Annual Allowance reduces by £1 (down to a possible minimum of £10,000). If your total taxable income is over £200,000, you should check if the Tapered Annual Allowance applies to you.
Lifetime Allowance and Lump Sum Allowances
The Lifetime Allowance (LTA) was abolished from 6 April 2024 and new Lump Sum Allowances were introduced. Historically, the LTA was the maximum amount you could build up in all of your registered pension savings throughout your working life before you had to pay additional tax.
With the abolition of the LTA there is no limit on the amount of pension savings you can build up. However, lump sum limits or allowances have been introduced. This includes the Lump Sum Allowance (LSA) which for most people limits the tax-free cash or lump sum you can receive from all your pensions to £268,275 (the amount being the same as 25% of the LTA at abolition). If you have an LTA protection, you may have a higher allowance. For further information please see below or visit gov.uk/tax-on-your-private-pension.
The Lump Sum Allowance (LSA)
The LSA is a cap on the amount of tax-free lump sum you can receive from all your registered pension arrangements. The standard LSA is £268,275. If you have an LTA protection, you may have a higher allowance.
If the only pension arrangement you are a member of is the Magnox pension scheme, you only need to consider whether the total tax-free lump sum you want to take from the Scheme is more than your available LSA. If you have previously taken pension benefits from either the Magnox pension scheme or another scheme, it will be taken into account and will reduce the available LSA for future retirements.
The Lump Sum and Death Benefits Allowance (LSDBA)
This is the cap on the tax-free lump sum that can be paid to, or in respect of, a member of a registered pension scheme. If the value of lump sum death benefits means that the LSDBA will be exceeded, the excess may be taxed at the marginal rate of income tax of the person receiving it. The standard LSDBA is £1,073,100. If you have an LTA protection, you may have a higher allowance.
Overseas Transfer Allowance (OTA)
This only applies to transfers out to a Qualifying Recognised Overseas Transfer Scheme. The OTA limit will be £1,073,100, unless a valid LTA protection is held. If the transfer value exceeds the OTA, there will be an overseas transfer charge (OTC) of 25%.
Please note that tax allowance limits are subject to change. Visit www.gov.uk/tax-on-your-private-pension for more information.
