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 contribute up to 100% of your earnings to your pension each year or up to the annual allowance of £40,000. Any payments made into your pension by you or your employer, plus any Government tax relief received, counts towards your annual pension allowance.

Contributions that exceed your annual salary or the £40,000 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 alowance.

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 £4,000. You can find out more about MPAA on the Money Advice Service website.

If you have an income of over £150,000, 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 £30,000 meaning the minimum resulting annual allowance would be no lower than £10,000.

Lifetime pension allowance

In addition to the annual pension allowance, a lifetime pension allowance is also applicable and places a limit on the value of pension benefits you can receive in a lifetime without having to pay excess tax. In 2017/18 the lifetime allowance is capped at £1 million and rises to £1,030,000 in 2018/19.

If you exceed the lifetime pension allowance you’ll be subject to an immediate tax whenever you take the excess benefits from your pension. 25% will be charged if paid as a pension or 55% if paid as a lump sum, plus income tax at your standard rate.

Drawing your pension

Once you reach age 55 or over, 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: 30-09-2018

Mobile phone showing balance Mobile phone showing balance

Your pension in one place

PensionBee combines all your pensions into a single, good value online plan.

Get started

Capital at Risk

Have a question? Call our UK team 020 3457 8444

Have a question?

Call our UK team

020 3457 8444

Monday-Wednesday 9:30am-6pm, Thursday-Friday 9:30am-5pm

Monday-Wednesday 9:30am-6pm
Thursday-Friday 9:30am-5pm