How much can I pay into my pension this year?
Pensions are an excellent way to save money for retirement with significant tax benefits. Contributions to pensions qualify for tax relief, and once in the pension, they grow with no liability to income tax or capital gains tax. However, it’s important to keep in mind the annual limit when deciding how much to contribute. Going over the limit means paying tax on the excess, which could eat away at your savings.
The main limits are called the Annual Allowance (AA) and the Money Purchase Annual Allowance (MPAA). The highest earners are subject to a modified form of the Annual Allowance called the Tapered Annual Allowance (TAA).
In the Spring Budget 2023, the Government announced changes to the AA, MPAA, and TAA which will affect how much you can pay into a pension this financial year.
What is the Annual Allowance (AA)?
The AA is the annual contribution limit for individuals who have not previously accessed their pension. The AA for the current tax year is £60,000 which was increased from £40,000. Contributions over the AA can be made, but they will be subject to the AA Tax Charge, effectively removing the tax relief granted on the contribution.
What is the Money Purchase Annual Allowance (MPAA)?
The MPAA is the annual limit for pension input for individuals who have previously flexibly accessed their pension. The MPAA for the 2023/2024 tax year is £10,000. This has increased from £4,000 in the 2022/2023 tax year. Contributions over the MPAA are subject to a tax charge like the AA.
The MPAA’s main purpose is to limit the amount that can be contributed towards pensions in retirement. This means pension income cannot be recycled to receive additional tax relief.
What is the Tapered Annual Allowance (TAA)?
The TAA is a modified form of the AA for the highest earners. If your total taxable income crosses the £200,000 threshold in a tax year you’ll be subject to a test to determine whether your AA will reduce from £60,000. This effectively limits the amount you can pay into a pension in a tax year. By extension, this reduces the amount of tax relief you can claim on pension contributions. The maximum tapering is £50,000 which applies to those earning £360,000 and above, leaving you with £10,000 of allowance for the tax year.
Planning for retirement is crucial and knowing what counts towards your annual allowance is a big part of that. Remember: both personal and employer pension contributions go towards the AA/MPAA/TAA, so be sure to factor them in when calculating how much you’ve used up!
I’ve heard about the Lifetime Allowance as well, what is that?
The Lifetime Allowance was a maximum level of pension funds that could benefit from the generous tax advantages offered by pensions. Previously, this was £1,073,100, with anything over this amount subject to tax charges at either 25% or 55% (depending on how the pension money was accessed).
In the Spring Budget 2023, the Government announced its intention to abolish the Lifetime Allowance. Whilst the framework for the Lifetime Allowance remains in place for the current tax year, no Lifetime Allowance tax charges will apply where you exceed the limits between 6th April 2023 and 5th April 2024. From 6th April 2024, the Lifetime Allowance will be removed from legislation. We expect further details on this to be released over the coming months.
If you would like to discuss your pension contributions and wider pension planning further, please don’t hesitate to contact us here or by calling +44 (0)1903 213511.