A recent House of Commons report has found that the number of individuals breaching the Annual Allowance has climbed sharply over the last five years.

While the value of contributions exceeding the allowance has increased by 564% since 2015/16, the number of individuals breaching the allowance has risen by a massive 675%.

The Annual Allowance has stood at its current level since 2014. There is also the added complexity of two further allowances that could apply in specific circumstances, causing many to breach their allowance inadvertently.

Keep reading for your guide to the Annual Allowance, plus how to be sure your pension contributions are as tax-efficient as possible.

The Annual Allowance determines the value of the tax-efficient pension contributions you can make

When you pay into your pension, you receive tax relief on the contributions you make, up to the Annual Allowance. For the 2022/23 tax year, this stands at £40,000 (or 100% of your pensionable earnings, if lower).

Relief is applied automatically at the basic rate of tax (20%), meaning that a £100 pension contribution would cost you just £80. The remaining £20 is effectively added by the government.

Higher-rate taxpayers (earning between £50,270 and £150,000 in the 2022/23 tax year) are eligible for 40% tax relief. Those paying the additional rate of tax, meanwhile (earning more than £150,000) are eligible for 45% tax relief.

While basic-rate relief is added automatically, you’ll need to claim higher- and additional-rate relief through your self-assessment tax return.

Exceeding the Annual Allowance will mean that your contributions don’t benefit from tax relief. The value above the allowance will also be added to your taxable earnings for the year and taxed at the highest rate you pay. You might opt to let your pension scheme pay the charge, taking the amount directly from your pension. This is known as “Scheme Pays”.

Two other allowances could apply to you depending on your circumstances

1. The Money Purchase Annual Allowance (MPAA)

The MPAA was introduced alongside Pension Freedoms legislation back in 2015.

Taking benefits using certain flexible options – including an uncrystallised funds pension lump sum (UFPLS) – will likely trigger the altered allowance.

Once triggered, it can’t be removed and your Annual Allowance will decrease from £40,000 to just £4,000.

We can make sure you don’t trigger the MPAA by accident. This is especially important if you’re considering taking a phased retirement as the amount you can continue to contribute to your pension will be severely reduced.

2. The Tapered Annual Allowance

As a high-earner, you might fall foul of the Tapered Annual Allowance. This is a measure that looks to control the potential costs of tax relief by factoring in your income.

If your threshold income exceeds £200,000 during the 2022/23 tax year, your adjusted income will also be considered. If your adjusted income is more than £240,000, then your Annual Allowance reduces by £1 for every £2 of income you receive that exceeds this amount.

The taper will keep applying until your allowance reaches £4,000 – an Annual Allowance reduction of £36,000, applicable to those with income exceeding £312,000 a year.

The pension taper can be especially problematic if your salary isn’t static, as you could exceed the limit without realising it.

Expert Wealth can help you to manage your Annual Allowance

Pensions are incredibly tax-efficient, and a large part of this efficiency comes from the tax relief you receive on the contributions you make.

Be sure to:

• Make full use of your Annual Allowance if you can afford to.
• If you are a high- or additional-rate taxpayer, claim the extra relief due to you through your self-assessment tax return.
• Speak to Expert Wealth before you take retirement benefits flexibly so we can advise on whether the MPAA will be triggered. This is especially important if you intend to make further pension contributions.
• Track your earnings carefully if you think you might hit the Tapered Annual Allowance but be sure to speak to us if you are unsure.

Get in touch

With decades of experience, our Chartered Financial Planners can help you manage your pension contributions, whichever allowance applies to you. If you have any questions, please get in touch and speak to us today.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.