Whilst there isn’t technically a maximum value you can have in pensions, the Lifetime Allowance is the most you can save without attracting an unwelcome tax bill. Currently, it’s £1.055 million. If the total value of all your pensions exceeds this figure, when you come to take income or turn 75 you will be charged tax at:
Whilst the Lifetime Allowance might sound like a large figure, for higher earners, it might be surprisingly easy to exceed with decades of contributions and investment growth. The most you can pay in every tax year, the Annual Allowance, is also very restricted. Once again, if you unintentionally exceed it, you can expect a tax bill from HMRC.
Again, you can technically pay in as much as you like, but anything above the Annual Allowance does not qualify for tax relief. The Annual Allowance is limited to the equivalent of your earnings, capped at a maximum of £40,000 a tax year.
Over time, the Annual Allowance has been systematically reduced. In 2010/11 it was as high as £255,000, but it was deemed too generous for high-earners. Unfortunately, your allowance might be reduced even further, as the Tapered Annual Allowance was introduced in April 2016.
Tapering of the Annual Allowance
Effectively, if you earn more than £150,000 you could have a Tapered Annual Allowance. For every £2 of income above, your Annual Allowance will reduce £1. The most that can be deducted is £30,000, so if your income is £210,000 or above, your allowance is just £10,000.
But, as with all things pension planning, it’s not quite that simple. There are two classifications of your income; ‘Adjusted’ and ‘Threshold’.
Adjusted Income is calculated as all taxable income from earnings, investments and benefits in kind, plus employer pension contributions, minus any taxed death benefits received. If this is more than £150,000, you must check your Threshold Income.
To calculate that, you must take your Adjusted Income and minus personal gross pension contributions. If your Threshold income is above £150,000 and your Adjusted income above £110,000 you will have a Tapered Annual Allowance. It’s quite a complex arrangement, which is why it’s becoming more likely higher-earners will be caught out.
An opportunity to exceed your allowance
Fortunately, there is a way to make contributions above your Annual Allowance without a tax-bill, known as Carry Forward. If you were a member of a registered UK pension scheme and didn’t use your whole Annual Allowance in the previous three years, you can roll over the unused amount. This is particularly helpful if you have an irregular income.
Like Tapering, Carry Forward was also introduced in 2016, so you might have been benefitting from it without realising! But, if you are concerned that you might have or might be over-funding your pension, don’t hesitate to get in touch.
The complexity around the Tapered Annual Allowance is exacerbated by the lack of warning if you accidentally exceed it. In an ideal world, your employer or pension provider could advise you about likely restrictions, but as the information needed to calculate your personal circumstances comes from a number of sources, this is not currently possible.
More often than not, the most tax-efficient way of saving towards retirement is unique to your circumstances. If you’d like us to help make sense of your pensions, level of tax-efficient contributions and ensure you don’t get a surprise tax bill, our team of pension experts are here to help.
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