The Annual Allowance

The annual allowance effectively places an annual limit of £40,000 (2018/2019) on the total amount of tax efficient ‘pension input’ that can be made to registered pension schemes (both occupational and personal).

This means that if the total contributions to all registered money purchase schemes made by or on behalf of an individual (including by an employer), when aggregated with the increase in the capital value of any benefits accruing under a defined benefit scheme exceeds this limit, the individual will be subject to an annual allowance charge on the excess unless this can be mopped up by carrying forward any ‘unused’ annual allowance from the previous 3 tax years.  For the purpose of this carry forward facility, the ‘assumed’ annual allowance for tax years prior to 2018/19 is £40,000.If there is an annual allowance tax charge to pay, this will be applied at the ‘appropriate rate’ in order to cancel out any tax relief that you would have otherwise benefited from. In practice, this means that the tax charge will be:

  • 20% on any part of a pension input amount that falls in the basic rate tax band
  • 40% on any part of a pension input amount that falls in the higher rate tax band; and
  • 45% on any part of a pension input amount that falls in the ‘additional’ rate tax band

There are, however, specific exemptions for testing pension input against the annual allowance in the year of death or the year where an individual is diagnosed with serious or severe ill-health.