How much can I pay into a pension each year?

In order to avoid a pensions shortfall in later life, we’re advised to pay as much as we can afford into our pension pots. And the sooner we start, the better. But is there such a thing as too much when it comes to pension contributions and what impact can this have on the tax we pay?

Pension limits explained

In the UK there’s no cap on the amount of money taxpayers can save into a pension each year, however there is a limit on how much is tax-free. Whenever you make contributions to a pension you get tax relief from the government. This can come as extra money in your pot for the future, or a reduction in tax today, depending on the scheme you have in place. When you make contributions with PensionBee we will automatically add a 25% tax top up from HMRC.

Annual pension allowance

You can receive pension tax relief on any personal contributions that you make, up to 100% of your salary. There is also a separate limit on the sum of all contributions (personal contributions including tax relief, and employer contributions) that you can make in a tax year capped at £60,000 gross for (2023/24). This amount is known as the annual allowance and any contributions that you make over this limit are taxed at your highest rate.

Contributions that exceed the £60,000 allowance are subject to an annual allowance charge in line with income tax. Under the right circumstances you may have the option to carry forward any unused allowances from the previous three years, totalling up to £120,000, on top of your current year’s annual allowance.

If you’re working full time and are nearing retirement it can be advisable to save as much as possible. Just don’t forget to double check how much of your allowance you’ve used in recent years and that any contribution is not higher than your earnings.

For those who have already begun drawing a pension, the annual allowance for contributions under the money purchase annual allowance (MPAA), may be capped at £10,000.

If you have an income of over £260,000, including pension contributions, your annual pension allowance may be reduced. Additional rate taxpayers are most affected as for every £2 of income over £150,000, their annual allowance decreases by £1. The maximum reduction is £36,000 meaning the minimum resulting annual allowance would be no lower than £4,000.

Lifetime pension allowance

The lifetime allowance is currently £1,073,100 for the 2023/24 tax year. This doesn’t mean you’re unable to save above this amount, there’s no upper or lower cap for how much money you can have in your pensions. However in the 2023/24 tax year, any amount over the lifetime allowance will be taxed as income at your marginal tax rate. It has been announced by the Government that the lifetime allowance will be removed entirely in the 2024/25 tax year and replaced by an upper limit on how much tax-free cash you can withdraw, which is expected to be £268,275.

Drawing your pension

Once you reach age 55 or over (57 from 2028), you are eligible to start drawing your pension. You can take up to 25% as a tax-free lump sum, and will be charged income tax at your highest rate thereafter. Learn more about Drawdown from PensionBee today.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 04-09-2023

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